Author: National Law Forum

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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.

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.

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.

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.

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).

Presidential Pardon for Simple Marijuana Possession Leaves Out Many

Severe immigration consequences for certain non-U.S. citizens remain despite President Joe Biden’s pardon of all prior federal offenses for simple marijuana possession.

On October 6, 2022, President Biden took a major step toward the decriminalization of marijuana, pardoning all prior federal offenses for simple marijuana possession. Although this pardon will affect only approximately 6,500 individuals who were convicted of simple marijuana possession under federal law before October 6, 2022, it does not affect the much larger number of individuals who have been convicted of a marijuana possession offense under state law. To the disappointment of immigration advocates, the pardon does not benefit non-U.S. citizens who were not lawfully present in the United States at the time of their conviction, even if their conviction was under federal law.

Moreover, because marijuana is still listed as a Schedule I drug under the federal Controlled Substances Act:

Non-U.S. citizens can still be denied entry to the country for use of marijuana or for working or actively investing in the marijuana industry;
Immigration authorities may deny a non-U.S. citizen’s application for lawful permanent residence (green card) or naturalization on the ground that they have a conviction for a marijuana-related offense, an admission by the non-U.S. citizen that they have used marijuana in the past, or that they have worked or is actively investing in the marijuana industry; and
The Department of Homeland Security can still place individuals, including green card holders, into removal proceedings (deportation) as a result of marijuana-related offenses, unless the conviction was for simple possession of less than 30 grams.

In his order, President Biden urged governors to consider similar state law pardons for simple marijuana possession charges, which might affect many more individuals. President Biden has also asked the Department of Health and Human Services to consider changing the current Schedule I classification for marijuana. If one of these changes occurred, non-U.S. citizens would substantially benefit, as their state convictions for marijuana-related offenses might be pardoned, thus lowering the negative consequences for immigration purposes.

For now, however, non-U.S. citizens should still be wary of marijuana use, or working or investing in the marijuana industry, even in places in the United States or abroad where those activities are legal. While there may not be federal prosecutions for the use and possession of marijuana, there may be severe immigration consequences for non-U.S. citizens, because the use and possession of marijuana remains illegal in certain states.

Article By Carolina Guiral Cuervo of Jackson Lewis P.C.

For more biotech, food, and drug legal news, click here to visit the National Law Review.

FinCEN Issues Final Rule on the Corporate Transparency Act Requiring Businesses to Report Beneficial Ownership Information

On September 30, 2022, the U.S. Financial Crimes Enforcement Network (“FinCEN”) published its final rule implementing Section 6403 of the Corporate Transparency Act (“CTA”). The final rule, which will take effect on January 1, 2024, will require “tens of millions” of companies doing business in the U.S. to report certain information about their beneficial owners. The reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial beneficial ownership reports with FinCEN. Reporting companies created or registered on or after January 1, 2024, will be required to file initial beneficial ownership reports within 30 days of formation.

The CTA was passed by Congress on January 1, 2021, as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021. After publishing a Notice of Proposed Rulemaking and receiving public comments, FinCEN adopted the proposed rule largely as proposed, with certain modifications intended to minimize unnecessary burdens on reporting companies.

What Entities are Reporting Companies? The final rule describes two types of reporting companies: domestic and foreign.

A domestic reporting company is any entity that is a corporation, a limited liability company, or other entity (such as limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships and business trusts) created by the filing of a document with a secretary of state or any similar office under the law of a state or American Indian tribe.
A foreign reporting company is any corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a state or American Indian tribe.

What Entities are Exempt? The final rule exempts twenty-three separate categories of entities from the definition of the reporting company. Many of the exempted entities are already subject to federal or state regulations requiring disclosure of beneficial ownership information, such as banks, credit unions, depositary institutions, investment advisors, securities brokers and dealers, accounting firms, governmental entities, tax-exempt entities, and entities registered with the SEC under the Exchange Act of 1934. Additionally, the rules set forth an exemption for “large operating companies” that can demonstrate each of the following factors:

Employ more than 20 full-time employees in the U.S.
Have an operating presence at a physical office within the U.S.
Filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales (excluding gross receipts or sales from sources outside the U.S.)

Finally, under the so-called “subsidiary exemption,” entities whose ownership interests are controlled or wholly owned by one or more exempt entities may also qualify for exemption. If a reporting company was formerly exempt but loses its exemption, it must file an updated report that announces the change and includes all the information required in a reporting company’s initial report.

Who are Beneficial Owners? The final rule requires reporting companies to report each individual who is a beneficial owner of such reporting company. A “beneficial owner” is any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company. An individual exercises “substantial control” if such individual:

Serves as a senior officer (except for corporate secretary or treasurer)
Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body)
Directs, determines, or has substantial influence over important decisions made by the reporting company
Has any other form of substantial control over the reporting company

Additionally, an individual may exercise substantial control over a reporting company, directly or indirectly, including as a trustee of a trust or similar arrangement, through:

Board representation
Ownership or control of a majority of the voting power or voting rights of the reporting company
Rights associated with any financing arrangement or interest in a company
Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company
Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees
Any other contract, arrangement, understanding, relationship, or otherwise

The final rule exempts five categories of individuals from the definition of beneficial owner: (i) minors, (ii) nominees, intermediaries, custodians, and agents, (iii) certain employees who are not senior officers, (iv) heirs with a future interest in the company, and (v) certain creditors.

Who are Company Applicants? In addition to the beneficial owner information, the final rule requires reporting companies created or registered on or after January 1, 2024, to report identifying information about each “company applicant.” A “company applicant” is:

Any individual who directly files the document to create a domestic reporting company or register a foreign reporting company with a secretary of state or similar office in the U.S.
Any individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing

The final rule provides further clarification as to certain individuals who, by virtue of their formation roles, fall under the definition of “company applicants.” For example:

If an attorney oversees the preparation and filing of incorporation documents and a paralegal files them, the reporting company would report both the attorney and paralegal as company applicants.
If an individual prepares and self-files documents to create the individual’s own reporting company, the reporting company would report the individual as the only company applicant.

The final rule removes the requirements that i) entities created before the effective date report company applicant information and ii) reporting companies update their company applicant information (except to correct inaccuracies), each of which were set forth in the proposed rules.

When are Initial Reports Due? When an initial report must be filed depends on the status of the reporting company as of January 1, 2024:

If Created or Registered on or after January 1, 2024 – It must file a report within 30 calendar days from the earlier of: i) the date on which the company receives actual notice that its creation or registration has become effective, or ii) the date a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the company has been created or registered.
If Created or Registered Prior to January 1, 2024 – It must file a report not later than January 1, 2025.

What Information Must be Reported? An initial report must include the following information with respect to the reporting company:

The full legal name of the reporting company
Any trade name or “doing business as” name of the reporting company
The street address of the principal place of business of the reporting company (if outside the U.S., the street address of the primary location in the U.S. where it conducts business)
The state, tribal, or foreign jurisdiction of formation of the reporting company (a foreign reporting company must also report the state or tribal jurisdiction where it first registers)
The IRS Taxpayer Identification Number (“TIN”) of the reporting company (including the EIN of the reporting company, or if a foreign reporting company without a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction)

For each company applicant (of a reporting company registered or created on or after January 1, 2024) and each beneficial owner of a reporting company, the following information must be reported:

The full legal name of the individual
The date of birth of the individual
The current business street address (for a company applicant who forms or registers an entity in the course of such company applicant’s business) or residential street address (for all other individuals including beneficial owners)
A unique identifying number from, and image of, an acceptable identification document (e.g., a passport)

If a reporting company is directly or indirectly owned by one or more exempt entities and an individual is a beneficial owner of the reporting company exclusively by virtue of such individual’s ownership interest in the exempt entity, the reporting company’s report may list the name of the exempt entity in lieu of the beneficial ownership information set forth above.

When do Companies have to Report Changes? If there is any change with respect to required information previously submitted to FinCEN concerning a reporting company or its beneficial owners, including any change with respect to who is a beneficial owner or information reported for any particular beneficial owner, the reporting company is required to file an updated report within 30 calendar days of when the change occurred.

What are the Penalties for Violations? The final rule provides for a fine of up to $10,000.00 and/or imprisonment of up to two years for any person who willfully: (i) provides or attempts to provide false or fraudulent beneficial ownership information, or (ii) fails to report complete or updated beneficial ownership information to FinCEN. The penalties may also extend to individuals causing a reporting company’s failure to report or update information and senior officials of a reporting company at the time such failure occurs.

What is Coming Next from FinCEN? FinCEN is expected to publish the forms and instructions to be used for reporting beneficial ownership information well in advance of the effective date. FinCEN will further establish a secure nonpublic database for storage of the beneficial ownership information. Finally, FinCEN will issue rules on who may access the information (a limited group of governmental authorities and financial institutions), under what circumstances, and how the parties would generally be required to handle and safeguard the information.

What Should Reporting Companies be Doing Now? Existing companies should begin evaluating whether they are a “reporting company” and if so, determining who are their beneficial owners. Such reporting companies, including any other reporting companies that may be created or registered before the effective date, will have until January 1, 2025, to file an initial report. As noted, reporting companies created or registered on or after the effective date will have 30 calendar days after the date of creation or registration to file an initial report.

Article By Thomas G. Appleman, Arthur L. Griem, and Vera S. Hansen of Miller Canfield

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

Legal Standing in Trademark Non-Use Cancellation Actions

In recent years the Mexican Patent and Trademark Office (IMPI) allowed the possibility that complainants credit their legal standing on trademark non-use cancellation proceedings through the existence of a trademark application without the need of initially demonstrating that such application was blocked to registration in view of the prior existence of third parties’ confusingly similar registered marks, as long as the official action citing the conflicting registration as pertinent barrier was submitted as subsequent evidence in the proceeding.

Accordingly, it started to be a common practice to file non-use cancellation actions submitting as evidence a certified copy of the trademark application serving as a basis to attack the registration not being used accompanied with the results of an availability search showing the existence of the registration subject to the proceeding.

Nonetheless, such criteria adopted by IMPI was revoked by the Federal Court of Administrative Affairs and by Federal Circuit Courts sustaining that legal standing must be credited initially along with the complaint without being possible to do it at a later stage by submitting the evidence attesting that IMPI objected the registration of complainant’s trademark application on grounds of likelihood of confusion because of the existence of defendant’s registration.

The Court’s reasonings behind the revocation of such criteria were mainly based on legal certainty arguments stating that legal standing can only born when a formal objection is raised by IMPI communicating to the applicant the existence of a citation based on likelihood of confusion.

Therefore, IMPI is now starting to analyze and solve non-use cancellation actions following the Court’s legal reasonings stating that legal standing must be credited initially along with the complaint, without enabling complainants to credit such standing subsequently.

Consequently, it is advisable that titleholders file non-use cancellation actions only after being served with the official actions communicating the existence of pertinent barriers blocking the registration.

Article By Jaime Rodríguez of OLIVARES

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

4 Frequently Asked Questions About MSO Investigations and 3 Defense Strategies

In the last decade, Management Services Organizations, or MSOs, became popular service providers and investment tools for the medical and health care field. Unfortunately, the way some MSOs are structured, they can violate several important laws against healthcare fraud, like the Stark Law or the Anti-Kickback Statute.

Because this is such a novel issue in the medical field, lots of healthcare providers have questions about it. Some want to know how they can defend themselves if they get accused of wrongdoing for their activity with an MSO.

Dr. Nick Oberheiden is an MSO investigation lawyer at Oberheiden P.C. Here are some questions that he frequently gets asked and a few defense strategies that can help.

FAQs About MSO Investigations

1. What are MSOs?

An MSO is a company that provides administrative services to medical professionals. They can help healthcare providers with their:

Human resources
Operations
Coding and billing services
Office space management
Compliance
Contract management

Healthcare companies can either contract with an MSO to provide these services or can outright sell the administrative wing of their practice to an MSO so they can focus on the medical side of their business.

2. Why are MSOs Problematic?

MSO arrangements can become legally problematic when they act as an investment tool for medical professionals. Physicians could buy an ownership stake in an MSO that provided services to, say, a pharmacy. Those physicians could then begin referring patients to that same pharmacy.

In theory, that referral is going to a company – the pharmacy – that neither the physician nor his or her immediate family members have a financial interest in. In reality, though, the distinction gets blurred if the MSO – and therefore the physician – makes money off the referral. This can arguably amount to a kickback, which is unlawful.

3. Is Law Enforcement Actually Looking Into MSOs?

Yes, the justice department or the U.S. Department of Justice (DOJ) has recently begun investigating MSOs that appears to be a medium for illegal kickbacks from one healthcare provider to a referring physician.

Together with the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG), the DOJ has taken the position that MSOs that are only indirectly recouping physicians for referrals is enough to violate anti-kickback laws. In one case, the agencies are pursuing False Claims Act (31 U.S.C. § 3729) violations in addition to violations of the Stark Law (42 U.S.C. § 1395nn) and the Anti-Kickback Statute (42 U.S.C. § 1320a-7b).

However, not all MSOs have come under the scrutiny of federal law enforcement. The DOJ has not declared a blanket rule that all MSOs are unlawful. Instead, it is only targeting those that show the signs of potential healthcare fraud.

4. What are the Potential Penalties for Investing in the Wrong MSO?

At this stage, it is hard to tell. MSOs are still a new development, and we are only seeing the very first charges getting filed against physicians who invest in the “wrong” MSOs. Courts have not yet ruled whether MSOs can facilitate a kickback or amount to a false claim.

If courts do go along with the DOJ’s interpretation of the law, then physicians can face steep penalties for sending business to another healthcare facility that contracts with an MSO that they own or invest in.

The Anti-Kickback Statute is a criminal law that carries up to five years in prison for a conviction, as well as fines of up to $25,000 and program exclusion. The Stark Law is a civil law that, while it does not carry criminal sanctions or jail time, does impose:

Denial of payments provided
Disgorgement of ill-gotten gains
Civil penalties of up to $15,000 for each violation
Treble damages
Program exclusion

Defense Strategies for Investigations into Your MSO

If you do have an ownership stake in an MSO and are concerned about a potential investigation, or if you are interested in investing in one of these new companies and want to do it right, there are several things that you can do. While every case is unique, here are three defense strategies and compliance procedures that MSO investigation attorney Dr. Nick Oberheiden often recommends considering.

1. Look for Signs That an MSO is Problematic

Not all MSOs are attracting the attention of federal law enforcement. Instead, it is the ones that do not comply with the requirements of anti-kickback statutes and illegal referrals.

Some signs that an MSO is lacking in that department include:

A lack of a compliance officer in the company
No training regarding important laws like HIPAA, the Stark Law, or the Anti-Kickback Statute
The MSO is paid on a percentage basis, rather than through a flat fee (payments should be at fair market value rates)
The MSO charges unreasonably high service fees
There are incentives for investing physicians to refer clients to the company

All of these are strong signs that the MSO is at risk of civil or even criminal action for healthcare fraud and illegal referrals. Unfortunately, many of these signs also give an investing physician the power to increase his or her return on the investment – a feature that makes the investment seem especially lucrative.

2. Tighten Up the Compliance

If you are invested in an MSO and suddenly see proof that it was too good to be true, you are not powerless. You are a partial owner, after all. You can push the company to tighten up its compliance with anti-kickback laws. In the best cases, this can successfully protect you and avoid scrutiny from law enforcement. Even if it does not, though, it can reduce the restitution that you can be made to pay, and the efforts to fix the MSO can be used to show your good intentions.

3. Stress the Distance Between an MSO’s Ownership and Its Clients

At this point, we still have not seen whether law enforcement’s interpretation of the law will get adopted by a court. Until we know for sure that an indirect payment is enough for anti-kickback liability, a strong defense should be that the MSO’s ownership was too far removed from the MSO’s clients to amount to a violation of the law.

As Dr. Nick Oberheiden, an MSO investigation attorney at Oberheiden P.C., says, “The law is still very much in flux at this point. Kickbacks are generally seen to be direct payments for referrals, and the whole point of the MSO investment opportunity was to avoid that exact setup.”

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

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

Five New Employment Laws that Every California Employer Should Know

A new year brings new employment laws for California employers. California employers will want to begin revising employee policies and handbooks now, so that they are prepared to comply with these new laws when the majority of them go into effect on January 1, 2023. Here are five new employment laws that every California employer should know:

AB 1041 (Expanded Definition of “Family Member” for Medical and Sick Leave)

Through AB 1041, the California legislature amended Government Code section 12945.2 and Labor Code section 245.5 to expand the definition of “designated person” for purposes of employee medical leave. Section 12945.2 provides qualifying employees with up to 12 workweeks in any 12-month period for unpaid family care and medical leave. Section 245.5 relates to California paid sick leave. Both sections permit an employee to take protected leave to care for a “family member,” which is currently defined as a child, parent, grandparent, grandchild, sibling, spouse, or domestic partner. With the passage of AB 1041, the Legislature added a “designated person” to this list of “family members” for whom an employee may take protected leave. A “designated person” is defined as “any individual related by blood or whose association with the employee is the equivalent of a family relationship.” In light of this broad definition, employers should be prepared to provide employees with leave to care for a wider range of persons. An employee may identify his or her designated person at the time of requesting protected leave. However, an employer may limit an employee to one designated person per 12-month period.

AB 1949 (Bereavement Leave)

AB 1949 adds section 12945.7 to the Government Code, in order to provide employees with protected leave for bereavement. Under this new law, eligible employees may request up to five days of bereavement leave upon the death of a qualifying family member. Family member is defined as a spouse, child, parent, sibling, grandparent, grandchild, domestic partner, or parent in law. Although the employee must complete bereavement leave within three months of the family member’s death, the employer may not require that the five days be used consecutively. Statutory bereavement leave is unpaid, but the employer must allow the employee to use any accrued and unused paid vacation, personal leave, sick leave, or other paid time off for this purpose. Section 12945.7 prohibits discrimination, interference or retaliation against an employee for taking bereavement leave; also, the employer must maintain confidentiality when an employee takes bereavement leave. Finally, section 12945.7 does not apply to certain union employees, with an existing agreement regarding bereavement leave.

SB 1162 (Posting Pay Ranges and EEO Reporting Requirements)

SB 1162 modifies Government Code section 12999 and Labor Code section 432.3 to require employers to provide candidates with salary ranges on job postings, report employee compensation and demographic information to the California Civil Rights Department (formerly the DFEH) on an annual basis, and retain relevant records. For job postings (including those posted by third parties), employers with 15 or more employees will be required to include a pay range, which is defined as the salary or hourly wage range that the employer reasonably expects to pay for the position. In addition to the current requirement that, upon request, the employer must provide a candidate a pay range, the employer must now also provide existing employees with a pay range, when requested. Failure to comply with the pay range disclosure or record retention requirements can result in penalties of up to $10,000 per violation.

The new reporting requirement concerns annual employer pay data reports. Employers must now report the median and mean hourly rate by each combination of race, ethnicity, and sex, within each job category, with the first report due on May 10, 2023, based on 2022 pay data. Employers with 100 or more employees hired through labor contractors must now produce data on pay, hours worked, race/ethnicity, and gender information in a separate report. Employers who fail to timely file these required reports face civil penalties of up to $200 per employee.

Finally, employers must retain records of job titles and wage rate histories for each employee for the duration of the employee’s employment and three years after termination. Failure to comply with these retention requirements can result in penalties of up to $10,000 per violation.

AB 2188 (Off the Job Cannabis Use Protection)

Effective January 1, 2024, AB 2188 adds section 12954 to the Government Code, which prohibits employers from discriminating against a person because of cannabis use while off the job, with some exceptions. Employers may take action against a person who fails a pre-employment drug test, or other employer-required drug test, that does “not screen for non-psychoactive cannabis metabolites.” This is because, according to the California Legislature, cannabis “matabolites do not indicate impairment, only that the individual has consumed cannabis in the last few weeks.” The employer may administer a performance-based impairment test, and terminate any employee who is found to be impaired in the workplace. This new law does not apply to employees in the building or construction industry, or in positions requiring a federal background investigation or clearance, and does not preempt state or federal laws that require employees to be tested for controlled substances.

AB 152 (COVID-19 Supplemental Paid Sick Leave Extension)

AB 152 modified Labor Code section 248.6 and 248.7 in order to extend COVID-19 Supplemental Paid Sick Leave (SPSL), previously blogged about here, which was expected to expire on September 30, 2022. This new modification allows California employees to use any remaining SPSL through December 31, 2022. It does not provide employees with new or additional SPSL. In a departure from the original version of the law, when an employer requires an employee to take a COVID-19 test five days or later after a positive test result, the employer is now permitted to require the employee to submit to a second diagnostic test within no less than 24 hours. If the employee refuses, the employer may decline to provide additional SPSL. The employer obligation to cover the cost of any employee COVID-19 tests remains in effect.

Article By Kate Gold and Wesley C. Shelton of Proskauer Rose LLP

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

AUVSI and DOD’s Defense Innovation Unit Announce Collaboration for Cyber Standards for Drones

The Association for Uncrewed Vehicle Systems International (AUVSI), the world’s leading trade association for drones and other autonomous vehicles, announced a collaboration with the Department of Defense’s (DOD) Defense Innovation Unit (DIU) to further commercial cyber methodologies to design a shared standard. AUVSI’s effort is meant to expand the number of vetted drones that meet congressional and federal agency drone security requirements.

This pilot program would extend relevant cyber-credentialing across the U.S. industrial base and assist the DOD and other government entities in streamlining and accelerating drone capabilities across the board. Overall, this collaboration will help make the drone industry more secure. The program will work with numerous cybersecurity firms to conduct technical cyber assessments before the DIU, DOD, and other government entities conduct additional vetting as necessary.

Currently, the Blue UAS (Unmanned Aircraft Systems) Cleared List has 14 drones on it and 13 more drones are scheduled to be added. The Blue UAS Cleared List is routinely updated and contains a list of DOD-approved drones for government users. These drones are section 848 FY20 NDAA compliant, validated as cyber-secure and safe to fly, and are available for government purchase and operation. However, even with these additions, the demand for additional cleared drones with new capabilities and technology has outpaced the DIU’s ability to scale the program. This collaboration seeks to close that gap and offer cybersecurity certification in close cooperation with the DIU. With off-the-shelf drones serving as critical tools to help conduct diverse government operations, partnership with AUVSI and cybersecurity experts will make it easier for government users to use commercial technology and achieve effective operations in a secure manner.

Article By Kathryn M. Rattigan of Robinson & Cole LLP

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

Author: National Law Forum

First BIPA Trial Results in $228M Judgment for Plaintiffs

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