Category: Administrative & Regulatory

SEC Money Market Reform

Katten Muchin

On June 5, the Securities and Exchange Commission proposed major reforms to money market regulations that would significantly alter the way money market funds (MMFs) operate. The proposal sets forth two main alternative reforms, which may be adopted alone or in combination in a single reform package. The first proposed alternative would require all institutional prime MMFs to transition from operating with a stable share price to operating with a floating net asset value. The second generally would require every non-government MMF to impose a 2% redemption fee if its level of weekly liquid assets falls below 15% of its total assets, unless its board determines that the MMF’s best interest would be served by eliminating the fee or having a lower fee. The two proposed reforms are intended to, among other things, improve risk transparency in MMFs and reduce the impact of substantial redemptions upon MMFs during times of stress. The proposal also includes reforms designed to enhance MMFs’ disclosure, reporting, stress testing, and diversification practices.

For additional information, read more.

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Don’t Overlook The Gems In Equal Employment Opportunity Commission (EEOC) Files

Barnes & Thornburg

A recent decision out of a Louisiana federal court demonstrates that all employers who are sued in cases where the Equal Employment Opportunity Commission (EEOC) handled an administrative charge should promptly send out a FOIA request to obtain the EEOC’s file.

In Williams v. Cardinal Health Systems 200, LLC, a female employee reported to her employer that her husband had gotten into a fistfight with one of her co-workers, allegedly because the co-worker was sending her inappropriate text messages. The employee was fired shortly thereafter on Sept. 26, 2011.

Nine months later in June of 2012, a lawyer wrote to the employer on behalf of the former employee, suggesting that his client had suffered sexual harassment. The lawyer also suggested that the employer had retaliated against the employee for complaining of the sexual harassment when it fired her. A few weeks later, the lawyer helped the employee fill out and submit an EEOC intake questionnaire form.

After receiving the questionnaire, the EEOC advised the former employee that her questionnaire was incomplete, and that, among other things, she needed to sign and verify her allegations. Her lawyer eventually provided the necessary information, and the EEOC sent out a notice of charge of discrimination to the employer in October 2012, followed by a notice of right to sue. The employee then filed a lawsuit against the company in December 2012.

The employer filed a motion to dismiss the lawsuit, arguing that the employee had waited too long to bring her claim. The court noted that the employee had 300 days from the date of the alleged retaliation—or until July 22, 2012, to raise her claims with the EEOC. She had contacted the EEOC before then, but her questionnaire was incomplete. The charging party and her lawyer did not complete it before July 22. Thus, her claims were time-barred and her case dismissed.

The case provides a good example of an important litigation tool. The dismissal hinged on the EEOC’s file, which proved when the employee submitted her questionnaire, what the questionnaire contained, how the EEOC responded, and when and how her lawyer supplied the additional information. Employers typically are not privy to these communications and would not even know about them unless they obtain a copy of the agency’s file. And there is the lesson: all employers who are sued should make sure to request the EEOC or charging agency file as soon as possible. You never know what gems might be hiding in there just waiting for you to find them.

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California’s Future Uncertain as U.S. Bureau of Land Management (BLM) Postpones Oil and Gas Lease Auctions

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Recently, the U.S. Bureau of Land Management (BLM) announced that it would postpone all oil and gas lease auctions in California until at least October 2013.  The agency cited the toll of litigation and other costs as factors behind the decision.

Many attribute the postponement to an April 2013 federal district court ruling in Center for Biological Diversity, et al. v. Bureau of Land Management, et al., United States District Court for the Northern District of California, Case No. 11-06174 PSG, in which the court held that BLM violated the National Environmental Policy Act by failing to analyze potential environmental impacts of “fracking” on 2,700 acres of federal lands in Monterey and Fresno Counties before leasing the lands to oil companies.  Hydraulic fracturing, or fracking, involves injecting high-pressure mixtures of water, sand or gravel, and chemicals into rock to extract oil.  The technique has been used for decades in California, and is also used in other states to recover natural gas.  However, fracking has recently been under increased scrutiny, amid concerns that the practice could contaminate groundwater.

The court’s decision in Center for Biological Diversity does not void the leases that were the subject of the case, but requires BLM to go back and take a closer look at the potential impacts of fracking.  The ruling is largely limited to the specific facts that were before the court, and the case is unlikely to have sweeping application as a legal precedent, but it marks a victory for environmental groups attempting to stop, or at least delay, fracking in California.

BLM’s decision to postpone oil and gas lease auctions in California coming on the heels of the Center for Biological Diversity decision suggests that policy impacts of the case may be more widely felt.  BLM announced this month that it will put off a previously scheduled late May auction for leases to drill almost 1,300 acres of public lands near the Monterey Shale.  The Monterey Shale is one of the largest deposits of shale oil in the nation, containing an estimated 15.4 billion barrels of recoverable oil.  Another auction for about 2,000 acres in Colusa County was also put on hold.

“Our priority is processing permits to drill that are already in flight rather than work on new applications,” Interior Secretary Sally Jewell told reporters in Washington.  The decision to postpone leasing doesn’t mean that drilling on existing leases will stop, but it does raise questions about what BLM will do in the fall, when the postponement expires, and how the postponement decision will impact oil and gas production more broadly.

California accounts for 6 percent of the 247 million acres under BLM control, and oil and gas drilling on BLM lands has been on the rise as advances in horizontal drilling and fracking have made hard-to-reach deposits recoverable.  The impact of litigation such as the Center for Biological Diversity matter on BLM, and on the industry as a whole, is therefore significant.

For California at least, the future is uncertain.  “We want to get the greenhouse gas emissions down, but we also want to keep our economy going,” said Governor Jerry Brown (D, California), during a March 13 press conference.  “That’s the balance that is required.”  Amid budget concerns, financially strapped government agencies may be increasingly risk-averse when it comes to potential litigation, leading to decisions like the California postponement that have industry-wide implications.

As published in Oil & Gas Monitor.

What’s New Out There? A Trade and Business Regulatory Update

Sheppard Mullin 2012Proposed DoD Rule: Detection and Avoidance of Counterfeit Electronic Parts (DFARS Case 2012-D-005)

On May 16, 2013, the Department of Defense (“DoD”) issued a proposed rule that would amend the Defense Federal Acquisition Regulation Supplement (“DFARS”) relating to the detection and avoidance of counterfeit parts, in partial implementation of the National Defense Authorization Act (“NDAA”) for Fiscal Year (“FY”) 2012 (Pub. L. 112-81) and the NDAA for FY 2013 (Pub. L. 112-239). 78 Fed. Reg. 28780 (May 16, 2013). The proposed rule would impose new obligations for detecting and protecting against the inclusion of counterfeit parts in their products. Public comments in response to the proposed amendment are due by July 15, 2013.

The proposed rule, titled Detection and Avoidance of Counterfeit Electronic Parts (DFARS Case 2012-D-005), partially implements Section 818 of the NDAA for FY 2012 requiring the issuance of regulations addressing the responsibility of contractors (a) to detect and avoid the use or inclusion of counterfeit – or suspect counterfeit – electronic parts, (b) to use trusted suppliers, and (c) to report counterfeit and suspect counterfeit electronic parts. Pub. L. 112-81,§ 818(c). Section 818(c) also requires DoD to revise the DFARS to make unallowable the costs of re-work or other actions necessary to deal with the use or suspected use of counterfeit electronic parts. Id. The new rule also proposes the following in order to implement the requirements defined in Section 818.

  • Definitions: Adds definitions to DFARS 202.101 for the terms “counterfeit part,” “electronic part,” “legally authorized source,” and “suspect counterfeit part.”
  • Cost Principles and Procedures: Adds DFARS section 231.205-71, which would apply to contractors covered by the Cost Accounting Standards (“CAS”) who supply electronic parts, and would make unallowable the costs of counterfeit or suspect counterfeit electronic parts and the costs of rework or corrective action that may be required to remedy the use or inclusion of such parts. This section provides a narrow exception where (1) the contractor has an operational system to detect and avoid counterfeit parts that has been reviewed and approved by DoD pursuant to DFARS 244.303; (2) the counterfeit or suspect counterfeit electronic parts are government furnished property defined in FAR 45.101; and (3) the covered contractor provides timely notice to the Government.
  • Avoidance and Detection System: Requires contractors to establish and maintain an acceptable counterfeit avoidance detection system that addresses, at a minimum, the following areas: training personnel; inspection and testing; processes to abolish counterfeit parts proliferation; traceability of parts to suppliers; use and qualification of trusted suppliers; reporting and quarantining counterfeit and suspect counterfeit parts; systems to detect and avoid counterfeit electronic parts; and the flow down of avoidance and detection requirements to subcontractors.

Potential Impacts on Contractors and Subcontractors

Although the rule is designed constructively to combat the problem of counterfeit parts in the military supply chain, it imposes additional obligations and related liabilities on contractors and subcontractors alike.

  • The proposed rule shifts the burden of protecting against counterfeit electronic parts to contractors, thus increasing contractor costs and potential contractor liability in this area.
  • Under the proposed rule, contractors would need to take steps to establish avoidance and detection systems in order to monitor for and protect against potential counterfeit electronic parts, also increasing the financial and temporal impact on contractors.
  • Avoidance and detection system requirements will need to be flowed down to subcontractors, increasing subcontractors’ responsibility – and thus liability – for counterfeit parts.
  • The proposed rule would also make unallowable the costs incurred to remove and replace counterfeit parts, which could have a significant financial impact on contractors – even under cost type contracts.
  • As it currently stands, the narrow exception regarding the allowability of such costs applies only where the contractor meets all three requirements of the exception, which likely would be a rare occurrence.

Interim SBA Rule: Expansion of WOSB Program, RIN 3245-AG55

On May 7, 2013, the Small Business Administration (“SBA”) issued an interim final rule implementing Section 1697 of the NDAA for FY 2013, removing the statutory dollar amount for contracts set aside for Women-Owned Small Business (“WOSB”) under the Women-Owned Small Business Program. 78 Fed. Reg. 26504 (May 7, 2013). Comments are due by June 6, 2013.

The new rule would amend SBA 127.503 to permit Contracting Officers (“COs”) to set aside contracts for WOSBs and Economically Disadvantaged WOSBs (“EDWOSBs”) at any dollar amount if there is a reasonable expectation of competition among WOSBs as follows: (1) in industries where WOSBs are underrepresented, the CO may set aside the procurement where two or more EDWOSBs will submit offers for the contract and the CO finds that the contract will be awarded at a fair and reasonable price; or (2) in industries where WOSBs are substantially underrepresented, the CO may set aside the procurement if two or more WOSBs will submit offers for the contract, and the CO finds that the contract will be awarded at a fair and reasonable price.

The new rule would amend SBA 127.503 to permit Contracting Officers (“COs”) to set aside contracts for WOSBs and Economically Disadvantaged WOSBs (“EDWOSBs”) at any dollar amount if there is a reasonable expectation of competition among WOSBs as follows: (1) in industries where WOSBs are underrepresented, the CO may set aside the procurement where two or more EDWOSBs will submit offers for the contract and the CO finds that the contract will be awarded at a fair and reasonable price; or (2) in industries where WOSBs are substantially underrepresented, the CO may set aside the procurement if two or more WOSBs will submit offers for the contract, and the CO finds that the contract will be awarded at a fair and reasonable price.

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The Libor Scandal: What’s Next? Re: London Interbank Offered Rate

GT Law

The London Interbank Offered Rate (Libor) is calculated daily by the British Banking Association (BBA) and published by Thomson Reuters. The rates are calculated by surveying the interbank borrowing costs of a panel of banks and averaging them to create an index of 15 separate Libor rates for different maturities (ranging from overnight to one year) and currencies. The Libor rate is used to calculate interest rates in an estimated $350 trillion worth of transactions worldwide.

The Libor Scandal

The surveyed banks are not required to provide actual borrowing costs. Rather, they are asked only for estimates of how much peer financial institutions would charge them to borrow on a given day. Because they are not required to substantiate their estimates, banks have been accused of Libor “fixing,” or manipulating the Libor rate by submitting estimates that are exaggeratedly higher or lower than their true borrowing costs. This scandal has resulted in the firing and even arrest of bank employees.

Libor’s reputation came under fire in June 2012 when Barclays PLC agreed to pay over $450 million to settle allegations that some traders fixed their reported rates to increase profits and make the bank appear healthier than it was during the financial crisis. In the wake of this settlement, investigative agencies around the world began to look deeper into Libor rate fixing, leading to a $750 million settlement by the Royal Bank of Scotland and a record-setting $1.5 billion settlement by UBS AG. To date, there have been over $2.5 billion in settlements, with many more investigations ongoing. One investment bank estimates that, in total, legal settlements could amount to as much as $35 billion by the time investigations conclude.

Replacing the Libor

In the wake of the Libor scandal, international and domestic agencies have advocated for its replacement. The BBA, the group responsible for setting Libor since the 1980s, voted to relinquish that authority, and a committee of the UK’s Financial Reporting Council is currently vetting bids from other independent agencies interested in administering the new rate.

The International Organization of Securities Commissions (IOSCO) Task Force on Benchmark Rates, led by the head of the UK Financial Services Authority Martin Wheatley and the US Futures Trading Commission Chairman Gary Gensler, released a report last month saying that the new system should be based on data from actual trades in order to restore creditability. Wheatley and Gensler agree on the need to create a transaction-based rate, but disagree on how to transition from Libor to the new system.

Wheatley proposes that: the estimate-based Libor system be kept in place while a new transaction based rate is introduced to run alongside it under a “dual-track” system (so as to avoid disrupting existing transactions), and that the decision as to if and when to abandon Libor be left to market participants as opposed to regulators.

Gensler proposes a wholesale replacement of Libor as soon as possible and cautions that its continued use undermines market integrity and threatens financial stability.

IOSCO is also pushing for a code of conduct that would hold banks to a higher standard of honesty in reporting and setting index rates, while other agencies, including the Financial Stability Board and the European Union, are working on the development of other potential solutions including stricter regulations and greater penalties for rate-fixing conduct.

The future of Libor is unclear, but it is certain that whomever is chosen to replace the BBA will be under immense pressure and scrutiny from the international financial community.

Recommendations

To stay prepared, parties to financial transactions should view existing and future contracts with an eye towards potential benchmark changes. Parties should perform contractual due diligence to establish the range of Libor definitions and benchmarks to which they are exposed. In addition, parties should review the fallback provisions dealing with change or discontinuance of Libor and other benchmark rates to understand the potential impact of such changes.

Going forward, parties should include fallback provisions in their contracts to allocate risk and set up alternatives to mitigate the uncertainty that could arise in the event of any changes to the Libor system or other relevant benchmarks.

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United States Citizenship and Immigration Services (USCIS) Issues Final EB-5 Policy Memo

GT Law

On May 30, 2013, USCIS finally issued the much anticipated Final EB-5 Adjudications Policy Memorandum.  The Final EB-5 Adjudications Policy Memorandum makes significant changes to and provides clarifications for the EB-5 Program.  Here are some of the highlights:

  • Less Regional Center Amendments: The new memo states that USCIS does not require formal amendments to regional center designation when an RC changes its industries of focus, its geographic boundaries, its business plans, or its economic methodologies.  Previously, the I-924 listed “acceptable amendments” to include some of these. The memo clarifies the non-mandatory nature of these business changes.
  • An RC’s Geographic Area is Determined by Reasonableness:  For the first time, USCIS outlined that determinations on the geographic area of a regional center are based on the RC’s ability to establish by a preponderance of the evidence that the proposed economic activity will promote growth in the proposed area. This means that the RC must show that the proposed area contributes significantly to the supply chain and labor pool of the proposed projects.
  • Defines Hypothetical, Actual and Exemplar Projects: The memo states that if a project complies with the requirements of a Matter of Ho business plan, it is an “actual project.” If the project does not comply with Matter of Ho, it is “hypothetical.”  Additionally, an actual project requires more detail than a hypothetical. Finally, the memo defines an “exemplar” as an actual I-526 petition for a project that USCIS will review for EB-5 compliance, including all transactional documents (such as the offering materials).  This is important because if USCIS approves an “actual project,” USCIS will give deference to the later filed I-526s.  Hypothetical projects are not accorded deference at the I-526 stage.
  • We decided that already! Deference to Prior Decisions: Deference to already adjudicated matters is one of the most significant changes contained within the memo. For example, if USCIS approves an I-924’s Matter of Ho compliant business plan, it will give deference to this at the later I-526 stage.  I-924 approval notices should state whether a project has been approved as an exemplar or actual project, thereby being accorded deference in future adjudications.
  • Approved the Use of Escrow Accounts: USCIS explicitly approved investor’s use of escrow accounts as long as release of funds is immediate and irrevocable upon approval of the Form I-526 and acquisition of an immigrant visa or approval of Form 1-485 (adjustment of status).
  • Bridge financing Permitted If You Just Can’t Wait: If a developer uses bridge financing prior to receipt of the EB-5 capital, this will not affect the job creation calculation whether or not said financing was contemplated before the EB5 financing.  However, it is always a best practice to have contemporaneous evidence of the intent to use EB-5 capital.
  • USCIS Defers to State Adjudications of TEAs: USCIS will review state determinations of TEAs to see whether they used reasonable methodologies, but will otherwise defer to state determinations.
  • Eventual Acquisition of an Asset Does Not Count as “At Risk” Investment: If the investor is individually guaranteed the right to eventual ownership or use of a particular asset in consideration of the capital contribution, then the expected present value of the guaranteed ownership or use does not count toward total amount of the investor’s capital contribution in determining the amount of money truly at risk.
  • Restructure or Reorganization Means (probably) a Total Remodel or Significant Addition: Plans to convert a restaurant into a nightclub or add crop production to a livestock operation would constitute restructuring. This seems to mean USCIS wants a complete remodeling or significant addition to the existing business. “Reasonable time” to Create Jobs at I-829 is Not a Free Pass: Investors need not have created all the jobs at the I-829 stage, but need to be in “substantial compliance” and show that they will create jobs “within a reasonable time.”  This is not an open-ended allowance, but does provide some flexibility. After this time, jobs will not be considered unless there is a force majeure. 
  • Material changes at I-829 stage? Don’t Fret: An individual investor can proceed with their Form I-829 petition to remove conditions even if within the time between I-526 approval and submission of the Form I-829 a material change occurred to the business plan.  As long as the investor can show that they satisfy the conditions for removal of conditions, USCIS may still issue an approval.

Federal Contractors: The Federal Acquisition Regulation (FAR) E-Verify Clause Revisited – Critical Steps a Contractor Can Take To Foster E-Verify Compliance

Sheppard Mullin 2012

“Yes, we use E-Verify.” “Of course, our company is in compliance, we did an I-9 audit a few years ago – isn’t that the same as E-Verify?” “I know this is not an issue, because I remember being told we addressed all I-9 and E-Verify issues.” “No, the General Counsel’s office doesn’t handle immigration issues.”

You get the picture. Many companies simply do not take immigration compliance seriously. This failing usually does not come from a disinterest in compliance, but rather from a threshold failure to understand the intricacies involved in immigration issues or the potential exposure that could result from noncompliance. Only when faced with government investigations, public scrutiny, or other negative impacts on the business do the right people in the right places start to pay attention. When they learn that federal contractors can be suspended or debarred for failing to adhere to immigration and E-Verify related issues that attention is heightened.

It has been almost three years since the Federal Acquisition Regulation (FAR) E-Verify clause (FAR 52.222-54) for federal contractors went into effect in September of 2009. E-Verify is a free, internet-based system that electronically verifies the work eligibility of new employees by comparing the Form I-9 related information employees submit with the records of theSocial Security Administration (SSA) and the Department of Homeland Security (DHS). Close to 450,000 employers are now enrolled in E-Verify. While the Government does not charge contractors to use the program, companies should be cognizant of the operational costs associated with E-Verify, including costs connected to training, monitoring, and verifying compliance with the System. In the case of federal contractors, E-Verify must be used to verify all new employees as well as existing employees assigned to a contract. However, there is also an option available to verify an entire existing workforce upon receipt of a qualifying federal contract.

Not every federal contract, however, will be subject to the FAR E-Verify requirements. FAR 52.222-54 exempts federal contracts that include only commercially available off-the-shelf (COTS) items (or minor modifications to a COTS item) and related services; contracts of less than the simplified acquisition threshold (currently $150,000); contracts that have a duration of less than 120 days; and contracts where all work is performed outside the United States. As defined in FAR 2.101, a COTS item is: (i) a commercial item, (ii) that is sold in substantial quantities in the commercial marketplace, and (iii) that is offered to the Government without modification as the product is available in the commercial marketplace. There are other employee-related exemptions that federal contractors should be familiar with, including employees hired before November 7, 1986, employees with specific security clearances, and employees that have previously been processed through E-Verify by the federal contractor.

Compliance is Non-Negotiable

To date, the Government has been fairly lackadaisical in its review of compliance in the E-Verify arena. Accordingly, it is not surprising that E-Verify compliance may not fall very high on a federal contractor’s list of legal concerns. However, with a comprehensive immigration reform package, that includes a mandatory E-Verify provision and new laws percolating in the States, contractors should reconsider their priorities. Increased enforcement is likely and a proactive review of current E-Verify related processes, including sub-contractor flow down, and other policies is recommended.

In fact, U.S. Citizenship and Immigration Services (USCIS), the agency that runs the E-Verify program, has beefed up its Monitoring & Compliance Branch’s activity to review to detect, deter, and reduce misuse, abuse, and fraud. And who can blame it? The agency clearly wants to be in a position to provide detailed E-Verify data and good-looking numbers to Congress as the immigration debate heats up in Washington, DC. Fortunately for USCIS, ample funding has been designated for the program. As a result, participants have benefited not only from an extraordinary increase in E-Verify resources and training aides, but also from immensely improved technology used in the system.

It is no surprise that along with the increased funding comes increased monitoring of usage. In fact, USCIS site visits and desk reviews appear to have escalated. A number of companies recently have received calls informing them they are not in compliance with E-Verify procedures. The calls are friendly and are sometimes coupled with an “offer of assistance” in the form of a USCIS visit. By the way, it is an offer you cannot refuse without being viewed as uncooperative – not a good thing for a Government contractor.

Such visits and calls from the USCIS’ Monitoring & Compliance Branch are to be taken very seriously. Accordingly, federal contractors not only should review and revise, but truly understand, the processes they have in place for E-Verify as well as the entire Form I-9 process. Such processes also should be tested periodically for accuracy and efficacy. Federal contractors should want to know whether their E-Verify policies actually are working in the field the way they are written on the paper. Nothing a company is doing should be a surprise to the general counsel’s office, and nothing in the E-Verify reports should read like a foreign language to the individuals charged with overseeing the system.

History is Cyclical

The pace of E-Verify implementation picked up incredibly in June of 2010 when the GSA announced a mass modification of all Federal Supply Schedule (FSS) contracts that mandated the incorporation of E-Verify. Federal contractors continued to do their best to comply promptly, but oversights and omissions were inevitable.

Almost three years later, things are quieter on the E-Verify front, but the obligations and risks remain. While Immigration and Customs Enforcement(ICE) certainly reviews E-Verify matters, we have seen few if any reviews of federal contractor programs. But this soon will change. DHS likely will refocus and retool its worksite with a particular focus on E-Verify and other types of immigration compliance if the system is made mandatory for all U.S. employers. After all, USCIS no longer will have to sell its system. Everyone will buy it; there is no one else to buy it from, and there will be no choice but to buy it. It will be just a matter of when one buys. Government contractors, as the first purchasers of E-Verify, should expect to be among the first non-compliance “examples” when the time comes.

The Realities of E-Verify for Federal Contractors

There is no doubt that E-Verify is a best practice. However, it is not a replacement for background checks and other post-employment screenings and safeguards monitoring the system. In fact, the E-Verify system is still very much prone to identity theft, and must internally be monitored for misuse and overall compliance. While the Government agrees that E-Verify usage creates a “rebuttable presumption” that a company has not knowingly hired an unauthorized alien, there still can be problems. In fact, employers may face civil and criminal liability if, based upon the totality of the circumstances, it can be established that they knowingly hired or continued to employ unauthorized workers. Remember, a federal contractor’s participation in E-Verify does not provide a safe harbor from worksite enforcement. The Department of Justice’s Office of Special Counsel (OSC) also takes E-Verify violations very seriously and continues to open investigations involving abuse of the system. Unlike its sister agencies OSC has taken a keen interest in reviewing E-Verify related matters. Most notably, many of the OSC’s investigations do not involve malice in intent but rather accidental misuse of the system.

Best Practices for Federal Contractor’s

While not an all-inclusive list, federal contractors would be well served by considering the following proactive steps:

  1. Provide bi-annual training to anyone who is a user in the system. As E-Verify ramps up its site visits and desk reviews, compliance is more important than ever. Ensure your I-9 compliance is also in shape, as the I-9 data feeds into the E-Verify system.
  2. Verify your company has a viable policy established to flow down the E-Verify requirement to your sub-contractors, vendors. E-Verify usage is a “flow down” requirement; prime contractors are required to take steps to ensure that subcontractors for services or construction of more than $3,000 also implement the rules. Regardless of the size of your company, verify this process and take the extra step of seeing how it works in practice.
  3. Create a sub-contractor verification system. While the scope of a prime contractor’s “flow down” responsibilities to subcontractors and identifying which subcontracts are subject to E-Verify were not clearly defined in the FAR regulation, many believe merely having a copy of the “E-Verify Enrollment Page” of the subcontractor will not be enough when things go wrong.
  4. Carefully review the E-Verify exemptions. Limited exemptions for COTS contracts, contracts where work is performed outside of the United States, and for employees with specific active security clearances exist but are often harder to segregate and rely on then general usage of E-Verify. Consistency is key in deciding when to use E-Verify.
  5. Review overall immigration and visa compliance. In today’s world, it is simply not acceptable for employers, particularly large ones, to rely on an “off-the-shelf” compliance approach. Policies, electronic I-9 and E-Verify systems all must be vetted and monitored. Audits that review overall immigration compliance programs should address E-Verify compliance risk factors. Moreover, an independently audited immigration compliance program, preserves attorney client privilege and could protect employers from debarment or involuntary suspension from the E-Verify program. Specifically such a review should include the company’s Form I-9s, visa processes and E-Verify reports.
  6. Review E-Verify Usage. Do not assume everything is working the way it is supposed to. Someone needs to roll up their sleeves, and get dirty; ensure all users are closing case correctly and ensure all users know how to process Tentative Non-Confirmation notices. Reviewing E-Verify reports should be an ongoing, frequently completed task for someone in the organization. If you use an electronic I-9 system, it is even more important that you review the status of cases as well as historical data as often as possible. E-Verify only works well if a company first understands the importance of Form I-9 compliance.
  7. Review your Memorandum of Understanding (MOU) with the USCIS. The E-Verify program requires companies to agree to certain conditions upon enrolling in the system via the MOU. Do not take these responsibilities lightly. Ensure the specifics of the E-Verify agreement are accurate and up to date. For example, does the company still have two hiring sites? Is the company no longer performing E-Verify from the centralized location noted in the MOU? Almost three years after the FAR E-Verify clause went into effect, we still run across government contractors that are not enrolled in the E-Verify program or not correctly enrolled. We also routinely run across large prime contractors that have not adequately implemented their E-Verify program and flow-down procedures.
  8. Consider the impact of E-Verify as it pertains to any Union presence the company may have. A careful review of the National Labor Relations Board (NLRB) claim that use of E-Verify should be bargained is something to be carefully reviewed by federal contractors and their affiliates.
  9. Ensure you track employees assigned to contracts if your entire workforce was not E-verified at the onset. It is critical to have someone charged with knowledge of which employees are assigned to a contract within the meaning of the regulations and a system in place to E-Verify any legacy employees that have not previously undergone verification.
  10. Review E-Verify in the context of your current corporate structure or in terms of a merger, acquisition or other restructuring. A careful assessment of a federal contractor E-Verify related responsibilities and the associated timelines involved during any restructuring must be carefully considered. It is also important to analyze which affiliated entities are considered under government contract for purposes of the E-Verify clause. An affiliate or subsidiary with a different EIN may not necessarily be subject to the E-Verify provisions.

Debarments and Other Penalties

Federal contractors will continue to be responsible for E-Verify compliance for the foreseeable future. The consequences of a failure to use the E-Verify program leading to the loss of current and future federal contracts should not be downplayed. Federal contractor compliance with the E-Verify MOU is a performance requirement under the terms of the federal contact. As such, termination of the contract for failure to perform is one potential consequence of noncompliance with the MOU. Suspension or debarment, of course, also may be a potential consequence where the violation suggests the contractor is not responsible. Indeed, the E-Verify program’s suspension and debarment enforcement activities are being ramped up. DHS already ranks high on the agency list for debarment numbers, leading with a significant number of non-procurement FAR debarments. In FY12, ICE alone debarred 142 businesses and 234 individuals. Federal contractors need to take this enforcement activity seriously as it likely will increase in the face of mandatory E-Verify.

In short, now is the time for companies proactively to review internal polices, perform the necessary risk assessments, conduct the Form I-9 exposure as well as anti-discrimination audits, and then take ownership of any changes or improvements that need to be made.

Top 10 Affordable Care Act Compliance Tasks for Employers in 2013

Dickinson Wright LogoWith apologies to David Letterman, here are the top 10 Affordable Care Act compliance tasks for employers in 2013:

  1. Continue tracking for purposes of reporting the value of health plan coverage provided during 2013 on Form W-2 issued in January 2014 (for employers who issue more than 250 Forms W-2).
  2. The maximum reimbursement from a health flexible spending account for plan years beginning on or after January 1, 2013 is $2,500.  Make sure employees are aware of any reduction from prior years.
  3. An additional Medicare tax of 0.9% must be withheld from the wages of employees making more than $200,000 beginning in 2013.
  4. The summary of benefits and coverage (“SBC”) must be distributed to eligible employees during the open enrollment period.  Any changes to the SBC must generally be distributed at least 60 days before the effective date.
  5. The first payment of the Patient-Centered Outcomes Research Institute fee (the “PCORI” fee or the “comparative effectiveness” fee) is due July 31, 2013, regardless of the plan year of the health plan.  This fee is $1.00 per covered member (including employees and dependents) for the first year and is reported to the IRS on Form 720.  Health insurers will file the form and pay the fee for insured plans; a plan sponsor of a self-insured plan is responsible for filing and payment with respect to any self-insured plan.
  6.  A notice of availability of the Health Insurance Marketplace (formerly called the Exchange) must be given to current employees on or before October 1, 2013 and to all employees hired on or after October 1, 2013.  Model notices are available on the DOL website.
  7. The DOL has also published new COBRA model notices. It is unclear when the updated notices must be issued, but it appears to be no earlier than October 1, 2013, as the new COBRA notices refer to the availability of the Health Insurance Marketplace as an alternative to COBRA coverage.
  8. Establish the measurement period, administrative period, and stability period for purposes of determining whether employees are “full-time” for purposes of eligibility for the health plan and for purposes of the “pay or play” penalty.  For current employees, these periods will start in 2013 for purposes of 2014 eligibility determinations.  Determine how and when you will communicate the rules – in the SPD?  During open enrollment? As part of the employee handbook?
  9. If you are not sure whether your business is a large employer, count the number of full-time employees and full-time equivalents for at least a 6-month period in 2013 to determine if the business has more than 50 full-time/full-time equivalent employees as of January 1, 2014.
  10. If you are a large employer and you wish to avoid “pay or play” penalties in 2014, evaluate plan design and employee contributions to determine if the lowest cost option provides minimum value and is affordable.  Make sure waiting periods are not longer than 90 days.

Last word of advice: stay on top of continuing developments and be prepared for questions from employees.  It is a time of great change and uncertainty for employees as well as employers.

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America Invents Act (AIA) Reform: An Interview with a Former Patent Judge of the U.S. Patent and Trademark Office

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With its recent overhaul to the patent system, the Leahy-Smith America Invents Act (“AIA”), enacted by Congress on September 16, 2011, makes significant changes to the way patent infringement claims are brought and adjudicated. However, whether these changes actually revolutionize the system or fall short and lack luster is a contentious topic best left to the experts, such as James T. Carmichael. Mr. Carmichael has previously served as Administrative Patent Judge on the Patent Trial and Appeals Board (“PTAB”), formerly known as the Board of Patent Appeals and Interferences, and prior to that as Associate Solicitor of the U.S. Patent and Trademark Office (“USPTO”), and currently represents inventors and patent challengers before the USPTO in private practice with Miles & Stockbridge. He has definite opinions on the overall strength and benefits of the Act. These include the potential reduction of litigation expenses by 90% and the ability for a patent to be cancelled more quickly and easily.

Patent Infringement Nuisance Lawsuits

The most significant way that the AIA revamps the patent system is by way of reducing the nuisance value of a lawsuit. Lawsuits brought by non-practicing entities (“NPE”) consist of a business or individual who is not producing or marketing the patent but nonetheless enforces the patent against alleged infringers. The average legal cost for defending patent infringement remains about $3 million. As such, defendants tend to settle rather than pay the high attorneys’ fees, even if the lawsuit is frivolous or weak. Mr. Carmichael opined that the AIA helps decrease this practice because it can cut the legal costs to $300,000. This in turn will help drive the settlement value down, providing NPEs with less incentive to pursue nuisance settlement amounts in the hundreds of thousands or more.

Critics of the AIA point out that even though plaintiff NPEs recover significantly less under the new provision, they make up for the difference in settlement amounts by simply suing a higher number of alleged infringers. As such, NPEs are developing a new business model in response to the AIA that has the “effect of spreading the pain.” Moreover, small businesses are still adversely affected by even the smaller settlement amount and may opt to settle rather than pursue litigation, thus continuing the practice of nuisance value suits before the AIA.

Mr. Carmichael concedes that the new legislation reduces the cost of litigation but not necessarily the number of suits filed. However, he insists that the AIA is a “big step in the right direction” and succeeds generally in bringing the nuisance value down. According to him, industry largely supports the AIA because it reacts and provides a solution to the high cost of striking down an invalid patent before the AIA revisions. In addition, not every patent claim is from a NPE with a nonmeritorious case and many patent claims are legitimate and should be asserted, given the value of patent rights.

Patent Post-Grant Process Under PTAB

The AIA reduces the cost of striking an invalid patent by providing for post-grant opposition which provides an alternative to litigation. Under the newly-implemented inter partes review (IPR), an entity or business may challenge the validity of the patent at the PTAB. IPR will be decided by a PTAB three-judge panel, whereas under the previous system of reexamination, patent examiners from the Central Reexamination Unit (CRU) determined the patent claim rights. According to Mr. Carmichael, the benefit of adjudication under PTAB is that it is easier for PTAB to cancel a patent then for a jury to invalidate a patent. Under the AIA, there is no presumption of validity applied in the patent review process so deference is not given to the patent examiner. Further, a patent challenger can go directly to the administrative judges to challenge the patent with more technical and nuanced arguments that cannot adequately be made to a jury. The new procedures “grant effective ways to determine if a challenge is valid,” according to Mr. Carmichael. Ultimately, striking an invalid patent is “faster and easier than before, mainly because these proceedings are conducted by PTAB, not [CRU patent] examiners or courts.”

In addition, under the AIA, patent review is provided the maximum time limit of one year, whereas under reexamination, no such time limit existed and the correction of patents was a time-consuming process. Parties could potentially add new arguments under reexamination but the new patent post-grant opposition process will be more efficient. Prior legislation did not have this time limit, which is one reason why Mr. Carmichael deemed it as ineffectual as compared to the AIA.  Courts are now likely to stay patent infringement proceedings in view of the speedier PTAB processes.

A Successful Verdict for the AIA’s Patent Reform Provisions

Ultimately, Mr. Carmichael views the AIA legislation as the “first in history” to successfully accomplish diminishing the nuisance value of a patent infringement suit and provide effective avenues of opposition to patent challengers with meritorious claims. Mr. Carmichael dismisses complaints from critics of the legislation, stating “I think it did enough for what it was trying to accomplish.” According to Mr. Carmichael, the AIA will serve as the “most powerful tool in history to challenge [patent] validity.” The final enactment of the legislation occurred recently on March 16, 2013, and only time will tell whether the rest of the legal community agrees with him or not.

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Employers Have Until October 1st to Comply with Affordable Care Act’s Notice Requirements

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The Patient Protection and Affordable Care Act (the “Affordable Care Act”) represents the most substantial overhaul of the nation’s healthcare system in decades.  Much of the Affordable Care Act is meant to expand access to affordable health insurance coverage, including provisions for coverage to be offered through a Health Insurance Marketplace (the “Marketplace”) beginning in 2014.  As part of the overhaul, the Affordable Care Act requires most employers to provide written notice to their employees of coverage options available through the Marketplace and to give employees information regarding the coverage, if any, offered by the employer.

The United States Department of Labor (“DOL”) recently issued a Technical Release, which provides temporary guidance regarding the notice requirement and announces the availability of the Model Notice to Employees of Coverage Options.  The Technical Release can be obtained from the following link to the DOL’s website:  www.dol.gov/ebsa/newsroom/tr13-02.html.

Notice to Employees Under the Affordable Care Act

Beginning October 1, 2013, most employers must give a written notice to each employee,[1] regardless of plan enrollment status or the employee’s status as a part-time or full-time employee, with the following information:

  • The notice must include information regarding the existence of the new Marketplace as well as contact information and a description of the services provided by the Marketplace
  • The notice must inform the employee that the employee may be eligible for a premium tax credit under section 36B of the Internal Revenue Code if the employee purchases a qualified health plan through the Marketplace
  • The notice must include a statement informing the employee that if the employee purchases a qualified health plan through the Marketplace, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for federal income tax purposes

Employers must provide the notice to current employees no later than October 1, 2013 when “open enrollment” begins for coverage through the Marketplace.  For new employees, employers must provide the notice at the time of hiring beginning October 1, 2013.  For 2014, if the notice is provided within 14 days of an employee’s start date, the DOL will consider the notice to be provided at the time of hiring.

The notice must be provided to employees in writing.  The notice may be sent via first class mail or it may be provided electronically as long as the requirements of the DOL’s electronic disclosure safe harbor are met.  Employers may not charge their current employees or new hires a fee for providing the notice.

To assist employers with complying with the notice requirement, the DOL has drafted two model notices that meet the notice content requirements discussed above.  The model notice for employers who do not offer a health plan is available at the following link:  www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf.  The model for employers who do offer a health plan to some or all of their employees is available at the following link:  www.dol.gov/ebsa/pdf/FLSAwithplans.pdf.

Updated Model Election Notice Under COBRA

Under COBRA, a group health plan administrator must provide qualified beneficiaries with an election notice describing their rights to continuation of health insurance coverage and how to make an election.  A “qualified beneficiary” is an individual who was covered by a group health plan on the day before the occurrence of a qualifying event, such as termination of employment or reduction in hours that causes loss of health insurance coverage under the group health plan.

The DOL’s Technical Release includes a revised COBRA model election notice to help make qualified beneficiaries aware of other coverage options available in the Marketplace.  Upon the group health plan administrator filling in the blanks in the model election notice with the appropriate plan information and using the notice, the DOL will consider the use of the model notice to be good faith compliance with the election notice content requirements of COBRA.  Employers should begin using the model election notice immediately.

The COBRA model election notice can be obtained from the following link to the DOL’s website:  www.dol.gov/ebsa/cobra.html.

[1] Employers are not required to provide a separate notice to employees’ dependents or other individuals who are or may become eligible for coverage under the plan but who are not employees of the employer.

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