Category: Administrative & Regulatory

Nine Questions, Nine Answers: The Supreme Court’s Decision Overruling ‘Chevron Deference’

On the second-to-last day of its term, the US Supreme Court issued its decisions in Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Dep’t of Commerce. These decisions overruled Chevron USA. v. National Resource Defense Council, the 40-year-old precedent that established the “Chevron” doctrine, which gave federal agencies a certain amount of deference to interpret statutes they administer.

The Chevron doctrine provides that when a statute is ambiguous — that is, when it is unclear whether US Congress has spoken directly to the precise issue at hand — courts must defer to the interpretation of the relevant agency as long as the agency interpretation of the statute is reasonable.

Since 1984, the Chevron doctrine has played a foundational role in administrative law and placed federal agencies as the primary interpreters of the statutes they administered. In recent years, many scholars and policy advocates have questioned whether the Supreme Court should, or would, overrule Chevron and reassert the judiciary’s primary role in interpreting statutes.

The Loper Bright decision is available here. Understanding that for many, this decision has resulted in a deep dive into arcane issues of constitutional law and regulatory policy, below we ask and answer nine questions about the decision, its background, context, and likely impact.

What happened?

CASE BACKGROUND

Both Loper Bright and Relentless involve the Magnuson-Stevens Act, a law that empowers the US Secretary of Commerce and the National Marine Fisheries Service (NMFS) to require certain fishing vessel operators to provide space onboard their vessels for federal observers tasked with ensuring compliance with various federal regulations.

To implement the Magnuson-Stevens Act, NMFS issued a rule requiring the fishing companies, rather than the government, to pay the costs and salary of the observers (roughly $710 per day). The petitioners in Loper Bright, four family-operated herring fishing companies, argued that the Act did not authorize the agency to impose these fees and challenged the rule before the US District Court for the District of Columbia. Relentless involved a challenge to the same regulations by two New England fishing vessels brought in Rhode Island federal court.

The appellate courts reviewing Loper Bright and Relentless, the US Courts of Appeals for the DC Circuit and the First Circuit, respectively, both applied the “Chevron doctrine” and ultimately upheld the NMFS regulation.

The DC Circuit found ambiguity in the statute that justified deferring to the agency’s reasonable interpretation. The First Circuit, in turn, cited back to the DC Circuit’s opinion in Loper Bright and similarly found the NMFS regulation did not exceed “the bounds of the permissible.” The Supreme Court granted certiorari in both cases and, considering them together, addressed whether it should uphold, limit, or overturn Chevron.

THE LOPER BRIGHT DECISION

In a 6-3 decision, the Supreme Court overruled Chevron and held that courts must “exercise their independent judgment” when interpreting federal statutes and may not defer to agency interpretations simply because they determine that a statute is ambiguous.

Tracing the history of “deference” from the Federalist Papers through the New Deal, the Court explained that the judicial branch has always had the exclusive responsibility for interpreting the law. While courts should and did give “respect” to executive branch interpretations, the final decision has historically been for the courts alone.

The judicial branch’s role, explained the Court, was solidified in 1946 with the passage of the Administrative Procedure Act (APA), which provides that the courts will decide “all relevant questions of law” arising during a review of agency actions. The courts may “seek aid” from the agency interpretations, but courts still must “independently interpret the statute and effectuate the will of congress.”

The Court concluded that Chevron deference is inconsistent with this history and the text of the APA, and further noted that federal agencies (as opposed to federal judges) have no special expertise when it comes to interpreting statutes.

Why now? 

Chevron has been in the Court’s crosshairs for the better part of a decade. Justice Neil Gorsuch pointed out in a lengthy concurrence in Loper Bright that the Supreme Court has not applied the Chevron doctrine since 2016. In a separate dissenting opinion last year — discussed here — Justice Gorsuch outlined how the Chevron doctrine has been subjected to so many competing interpretations and carve-outs that it has been rendered practically unworkable and incoherent.

Further, as the majority recognized, if courts defer to agencies under Chevron, that approach is inconsistent with other interpretive doctrines, most notably the “major questions doctrine,” which the Court used to strike down the US Environmental Protection Agency’s (EPA) regulation of greenhouse gases in West Virginia v. EPAin 2022 because the Clean Air Act had not “expressly” granted EPA authority to require decarbonization of the US energy sector. (For more on this case, see here.)

Why is everyone talking about “Chevron deference”? 

Loper Bright, when read in conjunction with other decisions like West Virginia v. EPA from two terms ago or SEC v. Jarkesy, decided this term and discussed here, has been interpreted by some as the culmination of a long-term trend in which justices appointed by Republican presidents are reconfiguring US administrative law. Some view Chevron deference as a crucial safeguard to protect administrative agencies and permit them to regulate in highly technical areas based upon sometimes broad mandates from Congress without fear that a judge lacking technical knowledge or expertise would overstep. For those individuals, the end of Chevron deference represents a threat to the administrative state as we know it and raises fear that judges rather than agencies will decide the propriety of complex technical issues.

For others, Chevron deference represents a usurpation of the judiciary’s role in interpreting the law and leads to administrative agencies over-regulating and over-stepping the authority vested in them by Congress. Some groups may view Chevron deference as part and parcel of some unaccountable deep state. For these individuals, the end of Chevron deference represents a long-awaited victory against overactive agencies exerting authority beyond that granted by Congress.

For many, Chevron deference is simply an interpretive mandate that attempted to balance the judiciary’s role in statutory interpretation with some level of deference to the agency’s particular knowledge and expertise.

Any tendency to catastrophize may be exacerbated by this being a presidential election year. While the Loper Bright decision is important, the practical impact of it is debatable and not yet clear. While it is possible that Loper Bright will announce a sea change in administrative practice, it is also possible that Loper Bright’s calls for “administrative respect” but not “deference” will be modest in the near term. Further, the Court went out of its way to note that prior cases that applied Chevron to uphold an agency’s actions were still good law based on the doctrine of stare decisis and that “mere reliance on Chevron cannot constitute” a reason for “overruling such a holding[.]”

What does the decision mean for agency interpretations of their own regulations? 

It does not affect them. Kisor v. Wilkie, a 2019 Supreme Court decision, remains the key precedent governing judicial review of an agency’s interpretation of its own regulations. Significantly, Loper Bright cites Kisor favorably. Under Kisor,agency regulatory interpretations are entitled to deference if they are reasonable when viewed with traditional tools of statutory construction and courts should defer to agency interpretations that:

  • Are official positions of the agency made in some formal context.
  • Are consistent with prior formal interpretations of the agency.
  • Rest on actual agency expertise and not a litigation position.
  • Were issued with fair notice to regulated entities.

Citing the APA, the Court in Kisor stated that where a rule is ambiguous, “when a court defers to a regulatory reading, it acts consistently with [APA] Section 706.” For more on Kisor, see here.

Does the decision bar courts from considering an agency’s expert input?

It does not. The majority notes that

[d]elegating ultimate interpretive authority to agencies is simply not necessary to ensure that the resolution of statutory ambiguities is well informed by subject matter expertise. The better presumption is … that Congress expects courts to do their ordinary job of interpreting statutes, with due respect for the views of the Executive Branch. And to the extent that Congress and the Executive Branch may disagree with how the courts have performed that job in a particular case, they are of course always free to act by revising the statute.

Loper Bright acknowledges that Congress can delegate policymaking authorities and that reviewing courts should consider any such delegation in reviewing related challenges.

It also notes that “Congress expects courts to handle technical statutory questions. Many statutory cases call upon courts to interpret the mass of technical detail that is the ordinary diet of the law and courts did so without issue in agency cases before Chevron.” (Internal citation omitted.) The majority suggests that courts “do not decide such questions blindly” and that “parties” — including agencies — “and amici in such cases are steeped in the subject matter, and reviewing courts have the benefit of their perspective.”

In such circumstances, while “an agency’s interpretation of a statute ‘cannot bind a court,’ it may be especially informative ‘to the extent it rests on factual premises within’ [the agency’s] expertise.’” Accordingly, citing Skidmore v. Swift & Co., Executive Branch interpretations may still have particular “power to persuade, if lacking power to control.”

Will the decision allow regulatory challenges to be decided more quickly by courts?

Probably not. As we discussed above, nothing in Loper Bright portends that agencies now lack the ability to use technical input to justify how they have interpreted statutes they are tasked with executing. Further, the Loper Bright formulation of “respect” to agencies — with courts being empowered to make ultimate decisions about statutory interpretation — may procedurally look very much like pre-Loper Bright “deference” in terms of what sorts of briefs are filed, how technical evidence is submitted, or how courts process challenges.

Many disputes will also involve an additional layer of briefing related to the impact of the decision itself as challenges proceed through courts, particularly when there are questions about whether Congress delegated specific questions to agencies.

Will this decision result in more litigation? 

Yes. Post-Loper Bright, we can expect increase in challenges to regulations across the government, with parties evaluating what pre-Loper Bright regulations they can encourage the Court to revisit, especially in light of the Court’s decision in Corner Post v. Board of Governors, which effectively relaxes APA-related statutes of limitations in some cases. This litigation will occur even though the Loper Bright majority attempted to stem the tide by stating that agency rules which were enforceable before the decision remain good law for now. As we have discussed before, many regulatory challenges are filed in forums perceived to be hostile to regulation. Those cases will then percolate through appellate courts to flesh out what administrative litigation looks like after this decision, particularly on the issue of how courts can appropriately parse out statutory interpretation, which is in the province of the courts from decisions delegated by Congress to agencies.

The regulated community should use the Loper Bright decision as an opportunity to review key regulations that govern their operations and assess whether regulations are newly vulnerable. Our teams are ready to provide assistance in conducting this review.

Does the decision affect state law?

The Loper Bright decision binds only federal courts.

Traditionally, state courts have not uniformly adopted Chevron. Around half the states, including Illinois, New Jersey, New York, and Pennsylvania, allow for Chevron-style deference to state agencies. Others, including California and Virginia, allow some degree of deference depending on the particulars of agency decisions.

Given that Chevron deference has been controversial for some time, state legislatures in Arizona, Georgia, Idaho, Indiana, Nebraska, Ohio, and Tennessee have in recent years passed laws closely cabining deference afforded to state agencies. Florida voters amended the state constitution in 2018 to prohibit courts from deferring to state agencies. States including Arkansas, Colorado, Delaware, Michigan, Mississippi, and Utah have court decisions to the same effect. (See here for a more detailed discussion.)

What should we watch for next? 

In the coming days, many ArentFox Schiff teams will analyze how the Loper Bright decision will affect specific practice areas. Additionally, watch for our end-of-term wrap-up on administrative and environmental law.

© 2024 ArentFox Schiff LLP
For more news on Supreme Court Decision Overturning Chevron, visit the NLR Constitutional Law section.

It Ain’t Over ‘til It’s Over: IRS Reminds Taxpayers That Section 280E Applies to Marijuana Companies Until Rescheduling Becomes Law

This is a tax blog. Stay with me – it’s short.

While marijuana advocates celebrate the potential rescheduling of marijuana from Schedule I to Schedule III, the taxman has made clear that marijuana remains a Schedule I substance subject to Section 280E of the Internal Revenue Code. For those who aren’t cannabis tax specialists, 280E provides that:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Marijuana is a Schedule I controlled substance and is subject to the limitations of the Internal Revenue Code. As we previously reported, the Justice Department recently published a notice of proposed rulemaking with the Federal Register to initiate a formal rulemaking process to consider rescheduling marijuana to Schedule III under the Controlled Substances Act. That change would remove marijuana from the purview of 280E.

Predictably, a number of cannabis operators couldn’t help themselves and began filing amended returns seeking to avail themselves of what they apparently felt was a change in the law. The response from the IRS is clear:

Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment. Until a final rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E.

The reasoning is simple – marijuana is a Schedule I substance until it is not. While there is currently in place a process that could lead to the rescheduling of marijuana, it has not actually been rescheduled.

Cannabis operators can dream of a time when they will not be subject to the ravages of 280E, but for now that remains just out of grasp, albeit tantalizingly close.

As usual, stay tuned to Budding Trends. We’ll be monitoring all the impacts of rescheduling, including tax implications like this one.

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© 2024 Bradley Arant Boult Cummings LLP
For more on Cannabis, visit the NLR Biotech Food Drug section.

Investing in SAFE and Convertible Note Rounds ꟷKnow Your Bedmates!

Early-stage companies often rely on Simple Agreements for Future Equity (SAFEs) and convertible promissory notes to raise capital either prior to a company’s first priced preferred equity round, or to raise bridge capital between priced equity raises. In addition to the economic terms, investors considering participation in these financings should seek visibility as to the other investors in the round, and the potential misalignment of incentives among those investors.

Raising funds via SAFEs and convertible notes has a number of advantages for the issuer, not least of which is the speed with which such financings can be achieved. SAFE and convertible note financings involve significantly less documentation, legal lift, and expense than a standard preferred stock financing. Further, depending on how a SAFE or convertible note is structured, it can allow an early-stage company experiencing rapid growth (and, accordingly, valuation) to raise capital without selling equity at a valuation materially lower than the valuation it can justify in the next 12-24 months.

Similarly, SAFEs and convertible note rounds can appeal to early-stage investors. Again, the documentation is relatively straightforward and, to a large extent, consistent from transaction to transaction. Further, more recent iterations of Y-Combinator’s form SAFE include investor-favorite provisions that protect investors from dilution associated with the issuance of other convertible instruments.

That said, most SAFEs and convertible promissory notes include amendment provisions providing that their terms can be amended or waived with the approval of holders representing a majority of the total invested amount. Such amendments can fundamentally change the terms on which investors originally based their decision to participate in the SAFE or note round. For example, common amendments include reductions in the conversion discount, valuation cap, and/or required equity financing threshold at which the SAFE or note is required to convert. Perhaps more drastic, we increasingly see companies raising significant funds in multiple SAFE or note rounds without ever needing to do an equity financing prior to a liquidity event. In those instances, it is not uncommon for the company to get a majority-in-interest of the SAFE or noteholders to convert into equity on terms that bear little or no relation to what was contemplated in the original investment instrument.

Of course, you may ask, why would a majority-in-interest of the SAFE or noteholders agree to an amendment or adjustment that is not in their best interests? The answer is that savvy founders will often ensure that a majority-in-interest of the investors are “company-friendly,” with incentives that may be very different than those of a passive investor. For example, founders and their friends and family may control a majority of the round. Similarly, SAFE and noteholders may already have equity interests in the company, such that they see a net benefit to agreeing to changes in their note or SAFE terms that, viewed in isolation, are subpar.

Accordingly, before making a material investment in a SAFE or convertible note financing, investors should have a clear understanding of the maximum amount that can be raised, and the likelihood that a significant number of those investors may sign off on amendments that undermine the original deal terms.

© 2024 Winstead PC.

What Does the End of Chevron Deference Mean for Federal Health Care Programs?

On June 28, 2024, the Supreme Court rejected the doctrine of Chevron deference in the closely watched case of Loper Bright Enterprises v. Raimondo.[1] In a 6-3 decision, the Court held that Chevron’s rule that courts must defer to federal agencies’ interpretation of ambiguous statutes gave the executive branch interpretive authority that properly belonged with the courts. Moreover, the Court concluded that Chevron deference was inconsistent with the Administrative Procedure Act (APA), holding that the APA requires courts to exercise independent judgment when deciding legal issues in the review of agency action.

Loper will have significant and immediate implications for the U.S. Department of Health and Human Services (HHS), the federal agency charged with the administration of the federal health care programs, including Medicare and Medicaid. As detailed below, the Court’s decision sets a more exacting standard for courts to apply when reviewing HHS’s regulations and legal positions.

What Was Chevron Deference?

The doctrine of Chevron deference was established in 1984 by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.[2] In that case, the Court held when a “statute is silent or ambiguous with respect to the specific issue” raised regarding a statute that the agency administers, “the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”[3]

Although scholars have debated Chevron’s rationale at length, it generally was read to require deference based upon agencies’ presumed subject matter expertise and an assumption that Congress delegated authority to agencies—rather than courts—to fill in gaps in statutory schemes. Notably, the Supreme Court had not itself invoked Chevron deference since 2016, although lower courts have continued to rely on it regularly.[4]

What Did Loper Decide?

Loper involved two New England fishing companies appealing the D.C. Circuit’s ruling that applied Chevron deference to uphold the National Marine Fisheries Service’s interpretation of the Federal Magnuson-Stevens Act (the “Act”) as requiring fishermen to pay for the use of compliance monitors on certain fishing boats, even though the federal law is silent on who must pay. Petitioners used the case as a vehicle to present a broader challenge to Chevron,arguing that the doctrine has led to excessive deference to federal agencies, resulting in overregulation, the abdication of judicial responsibility to interpret statutes, and the unwarranted imposition of regulatory enforcement costs.

The Loper majority firmly rejected Chevron and held that the APA requires courts to exercise their independent judgment in deciding legal questions that arise in reviewing agency action. As the majority held, “courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.”[5]

Importantly, however, Loper noted that deference may still be afforded agencies in certain instances. First, the Court observed that the APA expressly mandates a deferential standard of review for agency policy-making and fact-finding.[6] Second, Loper explained that some statutes are best read to “delegate[] discretionary authority to an agency,” in which case a court’s role is to merely ensure the agency “engaged in ‘reasoned decisionmaking’” within that authority.[7] Lastly, Loper reaffirmed that an agency’s “expertise” remains “one of the factors” that may make an agency’s interpretation persuasive.[8]

How Will Loper Impact Federal Health Care Programs?

Loper’s directive that courts should construe statutes independently and not defer to agencies’ positions has enormous implications for providers and suppliers that participate in federal health care programs. Much of today’s health care landscape is governed by HHS’ regulations, impacting many Americans and much of the federal budget. For example, Medicare currently covers more than 67 million beneficiaries, and Medicare spending comprised 12% of the federal budget in 2022 and 21% of national health care spending in 2021.[9]

Federal health care programs like Medicare and Medicaid are established by statutes that set forth myriad requirements regarding the coverage of items and services, and how, when, and by whom those items and services may be furnished.[10] HHS’s various components—most notably the Centers for Medicare and Medicaid Services (CMS)—have issued numerous, detailed regulations to implement these statutes. HHS’s components also include FDA, CDC, HRSA, AHRQ, OCR, NIH, and many others that intersect with health care providers and suppliers regularly.

Going forward under Loper, future challenges to agency regulations will take place upon a much different playing field. This has several important implications:

  • More Legal Challenges: We expect to see more legal challenges brought against HHS’s regulations as they are issued. Loper expressly stated that it “does not call into question prior cases that relied on the Chevron framework,” so prior decisions affirming regulations should be stable.[11] But going forward, Loper means that courts have no “thumb on the scale” in favor of HHS’s legal positions, and so litigants may view Loper as increasing their odds of success. At the same time, this may create more uncertainty for providers and suppliers who must determine how to comply with new regulations under challenge.
  • Less Ability for HHS to Create New Programs or Impose New Requirements: Especially where HHS imposes new substantive requirements that are not clearly authorized by statute, HHS’s regulations may be vulnerable. For example, the challengers to CMS’s minimum-staffing requirements for nursing homes are sure to cite Loper.[12] Likewise, when HHS creates new programs or initiatives by regulation based on broad statutory language (e.g., HHS’s recent creation of rural emergency hospital regulations[13]), the regulations may be more vulnerable to challenges. As another example, legal challenges to FDA’s new rule on Laboratory Developed Tests are pending and will likely invoke Loper.[14]
  • More Incentive to Challenge Reimbursement Rules: Legal challenges are frequently brought to CMS’s rules governing reimbursement, which often have complicated statutory formulas subject to differing interpretations. Whereas in the past, courts often deferred to CMS’s interpretations,[15] Loper now creates more potential for providers and suppliers to seek more favorable legal interpretations to enhance reimbursement.
  • Slower and More Cautious Rulemaking: As HHS promulgates new regulations, it will now have to consider the enhanced litigation risk that Loper creates. This may lead to agencies slowing and proceeding more cautiously in rulemaking as agencies seek to craft defensible regulations.
  • Inconsistent Decisions by Courts: Because Loper directs courts to exercise independent judgment rather than defer to HHS’s interpretations, we expect that courts in different areas of the country may reach differing conclusions regarding HHS regulations. This may make certain geographic locations more advantageous for provider and supplier operations or expansions.

Conclusion

Going forward, courts will be more amenable than ever to siding with challenges to HHS regulations. This creates both challenges and opportunities for providers and suppliers who should carefully assess the legal basis for all new regulations.

The authors acknowledge the contributions of Callie Ericksen, a student at the University of California Davis Law School and 2024 summer associate at Foley & Lardner LLP.

[1] Loper Bright Enterprises v. Raimondo, No. 22-451 (June 28, 2024), together with Relentless, Inc. v. Department of Commerce, No. 22-1219, available here.

[2] 467 U.S. 837 (1984).

[3] Id. at 843 (emphasis added).

[4] See Am. Hosp. Ass’n (“AHA”) v. Becerra, 142 S. Ct. 1896, 1904 (2022) (determining that HHS’s preclusion of judicial review “lacks any textual basis,” remaining silent with respect to Chevron); Becerra v. Empire Health Found., 142 S. Ct. 2354, 2362 (2022) (illustrating that HHS’s reading aligns with the statute’s “text, context, and structure” in calculating the Medicare fraction for purposes of Medicare Part A benefits, without any mention of Chevron); Vanda Pharms., Inc. v. Ctrs. for Medicare & Medicaid Servs.,98 F.4th 483 (2024) (holding that CMS’s definitions of “line-extension” and “new formulation” did not conflict with the Medicaid statute).

[5] Loper Bright Enterprises v. Raimondo, No. 22-451, slip op. 35 (June 28, 2024).

[6] Id. at slip. op. 14 (citing 5 U.S.C. §§ 706(2)(A), (E)).

[7] Id. at slip op. 18.

[8] Id. at slip op. 25 (citing Skidmore v. Swift & Co., 323 U.S. 134 (1944).

[9] See KFF, Medicare 101 (published May 28, 2024), available here.

[10] See 42 U.S.C. §§ 1395–1395lll.

[11] Loper Bright Enterprises v. Raimondo, No. 22-451, slip op. 34 (June 28, 2024).

[12] See Am. Health Care Ass’n v. Becerra, No. 24-cv-114 (N.D. Tex) (challenging the rule issued at 89 Fed. Reg. 40876 (May 10, 2024).

[13] Conditions of Participation, 42 C.F.R. §§ 485.500-485.546 (Subpart E), and Payments, §§ 419.90-419.95 (Subpart J), 87 Fed. Reg. 71748, 72292-93 (Nov. 23, 2022),

[14] 21 C.F.R. § 809, 89 Fed. Reg. 37286 (May 6, 2024).

[15] See, e.g., Baptist Mem’l Hosp. – Golden Triangle, Inc. v. Azar, 956 F.3d 689 (5th Cir. 2020) (deferring to CMS’s rule addressing “costs incurred” for calculating Medicaid Disproportionate Share Hospital payments).

© 2024 Foley & Lardner LLP
For more news on Supreme Court Health Care Decisions, visit the NLR Health Law & Managed Care section.

Supreme Court Rules Against Taxpayers in IRC Section 965 Case

On June 20, 2024, the Supreme Court of the United States issued a 7-2 opinion in Moore v. United States, 602 U.S. __ (2024), ruling in favor of the Internal Revenue Service (IRS).

Moore concerned whether US Congress and the IRS could tax US shareholders of controlled foreign corporations (CFCs) on those corporations’ earnings even though the earnings were not distributed to the shareholders. The case specifically focused on the so-called “mandatory repatriation tax” under Internal Revenue Code (IRC) Section 965, a one-time tax on certain undistributed income of a CFC that is payable not by the CFC but by its US shareholders. Some viewed the case as hinging upon whether Congress has the power to tax economic gains that have not been “realized.” (i.e., In the case of a house whose value has appreciated from $500,000 to $600,000, the increased value is “realized” only when the house is sold and the additional $100,000 reaches the taxpayer’s coffers.)

However, Justice Brett Kavanaugh, joined by Chief Justice John Roberts and Justices Sonia Sotomayor, Elena Kagan and Ketanji Brown Jackson, rejected that position on the ground that the mandatory repatriation tax “does tax realized income,” albeit income realized by a CFC. On this basis, they reasoned that the question at issue was whether Congress has the power to attribute realized income of a CFC to (and tax) US shareholders on their respective shares of the undistributed income. This group of justices ultimately decided Congress does have the power.

The majority went out of its way to avoid expressing any opinion as to whether Congress can tax unrealized appreciation, with Justice Amy Coney Barrett’s concurrence and Justice Clarence Thomas’s dissent asserting that it cannot. Perhaps the Court was signaling a distaste for the Billionaire Minimum Income Tax proposed by US President Joe Biden, which would impose a minimum 20% tax on the total income of the wealthiest American households, including both realized and unrealized amounts, among other Democratic proposals.

Practice Point: We previously noted that certain taxpayers should consider filing protective refund claims contingent on the possibility that Moore would be decided in favor of the taxpayers. In light of the case’s outcome, however, those protective claims are now moot.

© 2024 McDermott Will & Emery
For more news on US Shareholders of Foreign Corporations Taxes, visit the NLR Tax section.

EEOC Unveils Final Rule Implementing Pregnant Workers Fairness Act PWFA

Go-To Guide:
  • Effective June 18, employers covered by the Pregnancy Workers Fairness Act (PWFA) are required to offer reasonable workplace accommodations to workers who are pregnant or have a condition related to pregnancy or childbirth.
  • PWFA applies to covered entities, which include public and private employers with 15 or more employees, unions, employment agencies, and the federal government.
  • A preliminary injunction was entered on June 17, which “postpones the effective date of the Final Rule’s requirement that covered entities provide accommodation for purely elective abortions of employees that are not necessary to treat a medical condition related to pregnancy” for the states of Louisiana and Mississippi.
  • Covered employers should review the requirements of the PWFA to ensure that their workplace policies and procedures allow for the requisite accommodations under the Act and follow current challenges to accommodations regarding elective abortions under the law.

The U.S. Equal Employment Opportunity Commission (EEOC) final rule implementing the Pregnant Workers Fairness Act (PWFA) went into effect June 18, 2024, but not without legal challenge.

The final rule, covered in a previous GT Alert, requires employers to offer reasonable workplace accommodations to workers who are pregnant or have a condition related to pregnancy or childbirth. The rule includes an exception for employers if the requested accommodation would cause the business an undue hardship.

However, the requirement of a workplace accommodation for “purely elective abortions” has been enjoined from implementation and enforcement in the states of Louisiana and Mississippi and against four Catholic organizations. On June 17, 2024, Judge David C. Joseph in the U.S. District Court for the Western District of Louisiana ruled that the EEOC overstepped its authority by requiring workplace accommodations for “purely elective abortions.”

The motions for preliminary injunction, filed by the states of Louisiana and Mississippi, as well as four entities affiliated with the Catholic Church, sought injunctive relief to the extent that the PWFA requires employers to accommodate purely elective abortions of employees. The court rejected the EEOC argument “that Congress could reasonably be understood to have granted [it] the authority to interpret the scope of the PWFA in a way that imposes a nationwide mandate on both public and private employers – irrespective of applicable abortion-related state laws enacted in the wake of Dobbs – to provide workplace accommodation for the elective abortions of employees.”

Based on its analysis, the court entered a preliminary injunction which “postpones the effective date of the Final Rule’s requirement that covered entities provide accommodation for the elective abortions of employees that are not necessary to treat a medical condition related to pregnancy” for the states of Louisiana and Mississippi and any agency thereof, any covered entity under the final rule with respect to all employees whose primary duty station is located in Louisiana or Mississippi, and the entities affiliated with the Catholic Church that sought the court’s involvement.1

What should employers know to ensure compliance with the PWFA, given the limited injunctive relief issued? Below is a summary of the law and considerations for implementing the rule, which is now effective.

Application

  • The PWFA applies to employees, which include applicants and former employees where relevant based on Title VII of the Civil Rights Act of 1964 (Title VII), as amended by the Pregnancy Discrimination Act of 1978.
  • The PWFA applies to covered entities, which include public and private employers with 15 or more employees, unions, employment agencies, and the federal government.
  • The states of Louisiana and Mississippi; employers located in Louisiana and Mississippi and with employees whose primary duty station is located within the states; and the U.S. Conference of Catholic Bishops, the Society of the Roman Catholic Church of the Diocese of Lake Charles, the Society of the Roman Catholic Church of the Diocese of Lafayette, and the Catholic University of America are not required to provide accommodations for the elective abortions of employees that are not necessary to treat a medical condition related to the pregnancy.

What Is Considered a ‘Known Limitation’?

  • A limitation is “known” to a covered entity if the employee, or the employee’s representative, has communicated the limitation to the covered entity.
  • The physical or mental condition may be a modest or minor and/or episodic impediment or problem.
  • An employee affected by pregnancy, childbirth, or related medical conditions that had a need or a problem related to maintaining their health or the health of the pregnancy. “Pregnancy, childbirth, or related medical conditions” includes uncomplicated pregnancies, vaginal deliveries or cesarian sections, miscarriage, postpartum depression, edema, placenta previa, and lactation.
  • An employee affected by pregnancy, childbirth, or related medical conditions who sought health care related to pregnancy, childbirth, or a related medical condition itself.
  • There is possible overlap between the PWFA and the Americans with Disabilities Act (ADA) because in these situations, the qualified employee may be entitled to an accommodation under either statute, as the protections of both may apply.

What Is an ‘Undue Hardship’?

  • An employer or covered entity does not need to provide a reasonable accommodation if it causes an undue hardship, meaning significant difficulty or expense, to the employer.

The PWFA Prohibits the Following Conduct by Covered Employers

  • Failure to make a reasonable accommodation for the known limitations of an employee or applicant, unless the accommodation would cause an undue hardship;
  • Requiring an employee to accept an accommodation other than a reasonable accommodation arrived at through the interactive process;
  • Denying a job or other employment opportunities to a qualified employee or applicant based on the person’s need for a reasonable accommodation;
  • Requiring an employee to take leave if another reasonable accommodation can be provided that would let the employee keep working;
  • Punishing or retaliating against an employee or applicant for requesting or using a reasonable accommodation for a known limitation under the PWFA, reporting or opposing unlawful discrimination under the PWFA, or participating in a PWFA proceeding (such as an investigation); and/or
  • Coercing individuals who are exercising their rights or helping others exercise their rights under the PWFA.

Non-Exhaustive List Of Examples of ‘Reasonable Accommodations’

  • Additional, longer, or more flexible breaks to drink water, eat, rest, or use the restroom;
  • Changing food or drink policies to allow for a water bottle or food;
  • Changing equipment, devices, or workstations, such as providing a stool to sit on, or a way to do work while standing;
  • Changing a uniform or dress code or providing safety equipment that fits;
  • Changing a work schedule, such as having shorter hours, part-time work, or a later start time;
  • Telework;
  • Temporary reassignment;
  • Temporary suspension of one or more essential functions of a job;
  • Leave for health care appointments;
  • Light duty or help with lifting or other manual labor; or
  • Leave to recover from childbirth or other medical conditions related to pregnancy or childbirth.

Employer Training

  • Employers should consider training supervisors on how to respond to requests for accommodation.
  • Unlike requests for accommodation under the ADA, an accommodation pursuant to the PWFA may include a temporary suspension of essential job functions for qualified individuals (barring undue hardship to the employer).
  • Employees do not need to use specific words to request an accommodation to begin the interactive process.
  • Employers may not require that the employee seeking an accommodation be examined by a health care provider selected by the employer.
1 Further efforts to enjoin the implementation of the Rule were thwarted when the U.S. District Court for the District of Arkansas denied a motion for injunctive relief filed by a group of Republican state attorneys general on the grounds that the plaintiffs lacked standing to challenge the rule.
©2024 Greenberg Traurig, LLP. All rights reserved.
For more on the PWFA, visit the NLR Labor Employment section.

Implications of Executive Action for Family Unity and Retention of DACA Talent for Employers and Individuals

Highlights

  • On June 18, the executive branch announced one of the most significant executive actions affecting U.S. immigration since establishing the Deferred Action for Childhood Arrivals (DACA) program in 2012
  • The family unity action would allow many undocumented spouses of U.S. citizens to obtain green cards in the U.S. without needing to depart the country
  • The DACA provisions would make it easier for some DACA recipients to qualify for a work visa

On June 18, 2024, the Biden administration announced one of the most significant executive actions promoting family unity and streamlining the process for Deferred Action for Childhood Arrivals (DACA) recipients seeking to transition to work visas using existing legal authority.

Family Unity and Parole in Place for the Undocumented Spouses of U.S. Citizens

The executive actions initiate a process that will allow certain non-citizen spouses of U.S. citizens to apply for their green cards without leaving the U.S. Currently, a U.S. citizen can sponsor their non-citizen, foreign-born spouse for permanent residency by filing an I-130 immigration petition for the individual, regardless of their immigration status. Immigrant visas are available in this category without backlogs, unlike many other categories. However, undocumented spouses who didn’t enter the U.S. legally typically don’t qualify under current law to complete the permanent residency process in the U.S. In these situations, the spouse typically must depart from the U.S. to complete the process at a U.S. embassy or consulate abroad, thereby triggering a 10-year penalty to lawful readmission under immigration law unless waived due to hardship to a qualifying relative. This process is lengthy, uncertain and expensive, discouraging many of these families from pursuing these steps.

To provide relief, the Biden administration proposes to use the humanitarian parole authority of the executive branch to place qualifying individuals in a legal “parole,” which would then allow them to apply for adjustment of status. Approximately half a million spouses and stepchildren of U.S. citizens in “mixed-status” households could benefit from this change, if implemented.

The availability of this program, also known as Parole in Place, for qualifying non-citizen spouses will be formalized through a rule-making process and publication in the Federal Register. However, the subsequent announcement by the Department of Homeland Security (DHS) on June 18 included the following specifics for individuals to qualify:

  • Continuously resided in the U.S. for 10 years since June 17, 2014
  • Physically present in the U.S. on June 17, 2024
  • Legally married to a U.S. citizen as of June 17, 2024
  • Entered the U.S. without admission or parole and do not currently hold any lawful immigrant or nonimmigrant status
  • Have not been convicted of any disqualifying criminal offense
  • Do not pose a threat to national security or public safety
  • Merits a favorable exercise of discretion

This program would also include non-citizen children of these spouses (i.e., stepchildren).

All requests will consider the applicant’s previous immigration history, criminal history, the results of background checks, national security, and public safety vetting, and any other relevant information available to or requested by the U.S. Citizenship and Immigration Services.

Employers may stand to benefit from a substantial new group of individuals who will be work authorized and whose statuses could be legalized in the U.S. if this program proceeds.

DACA Recipients and Undocumented College Students

The administration subsequently announced that it is also taking additional steps to facilitate the process for DACA recipients to obtain work visas. DACA was created in 2012 by President Barack Obama as a means for immigrant youth who met certain eligibility requirements to qualify for work authorizations and obtain “deferred action.” While DACA protection has enabled hundreds of thousands of individuals to legally work and live in the U.S., the program has faced considerable uncertainty since 2017, when the Trump administration initially sought to terminate the program but was prevented from doing so in the federal courts.

The program continues to face legal challenges, and additional litigation before the U.S. Supreme Court is very likely. Fundamentally, DACA is not a legal status – the reliance on “deferred action” simply reflects DHS’ decision not to bring immigration removal proceedings against a specific individual. While many DACA recipients and their employers have since sought to transition to a work visa or other legal status that Congress specifically established in the Immigration and Nationality Act (INA), the process for doing so is uncertain, expensive and cumbersome. Since DACA recipients either entered without authorization or were out of status when they received DACA protection, they are typically ineligible for a transition to a lawful status within the U.S.

Instead, they are required under immigration law to “consular process” outside the U.S. and obtain a work visa at a U.S. consulate. The individual’s departure from the U.S. could trigger removal bars (similar to those described above), requiring the individual to obtain a temporary waiver of inadmissibility from the government. These waivers, known as “d3 waivers” based on the section of the INA to which they relate, can take months to obtain and the outcome of such a waiver is not certain. These cumulative issues have chilled the interest of many employers and DACA recipients in pursuing these waivers.

In the coming weeks, the administration is expected to announce additional steps to streamline the availability of d3 waivers. The U.S. Department of State will announce changes to its process for granting such waivers to DACA recipients through updates to the Foreign Affairs Manual, and DHS has indicated that it will adopt the State Department’s policy changes. These steps, if implemented, are very good news for many employers and the DACA recipients that they employ by providing a more efficient, robust and reliable process for transitioning DACA recipients to a more stable and lawful status in the U.S.

© 2024 BARNES & THORNBURG LLP
For more on the DACA Provisions, visit the NLR Immigration section.

Office Tenants: Do Due Diligence on Your Landlord

Office markets from coast-to-coast are struggling mightily, especially in major urban downtowns. Chicago’s downtown business district (i.e. the Loop) is no exception. Right now, Chicago’s Loop office vacancy rates are the highest since such rates have been recorded.

In April of this year, Crain’s Chicago Business reported that downtown office vacancy broke 25% for the first time on record, landing at 25.1%. This number reflects seven consecutive quarters of increasing vacancy.

What does this mean for tenants? Well…a lot.

It means opportunity as landlords feel pressure to fill vacant office space. Lease concessions that never would have been considered three years ago, might be available now. These days, on most office deals, tenants enjoy considerable leverage. While this market brings tenant’s many benefits, it also brings significant risks. Here are a few risks for tenants to consider before signing a lease:

1. Is your landlord in financial distress? Landlords will always vet an incoming tenant’s financial condition. The same often does not happen in reverse. Many office landlords face financial pressure now. If the landlord is at risk of foreclosure, or otherwise in financial peril, the tenant should have a number of concerns ranging from how well the building will be maintained to whether or not they will be staying in a bank-owned building soon. Tenants should fully inquire into landlord’s financial condition, especially if meaningful tenant allowances have been agreed to.

2. Subordination and Non-Disturbance Agreements are more important now than ever. “SNDAs” can go a long way towards protecting tenant’s lease rights in the event of a foreclosure.

3. Will “creative” uses come to the building? Never underestimate the ingenuity of the commercial real estate industry. All kinds of ideas have sprouted up as to what could be done to fill empty downtown office space. Indoor dog parks, pickle ball courts and the often tossed about notion of converting vacant office space into residential apartments are good examples. Tenants should find out before signing if the landlord has any designs on filling vacant space with uses that the tenant might find objectionable.

4. Co-tenancy provisions and the careful review of how operating costs will be allocated are critical. Who bears the risk of vacancy as to operating expenses? Tenants needs to know if fewer tenants means they will have a higher share of operating costs. Tenants also need to know if they have any way out of the lease if the building really struggles. No one wants to be alone in an empty tower.

© 2024 Chuhak & Tecson P.C.
For more on Office Tenants, visit the NLR Real Estate section.

Supreme Court Upholds Refusal to Register Trademark Containing the Name of Living Individual – Donald Trump

In a recent unanimous decision in the case Vidal v. Elster (602 U.S. ___ (2024)), the U.S. Supreme Court upheld the refusal to register a federal trademark for the phrase “Trump Too Small” based on the fact that the Lanham Act prohibits the registration of the name of a living individual without their consent. The plaintiff in this case, Mr. Elster, filed a federal trademark application in 2018 for the mark “TRUMP TOO SMALL” for use on clothing as shown below, without the prior consent of former President Trump, arguing that the phrase was intended to be a criticism of Donald Trump and his policies and that the refusal was a violation of Mr. Elster’s First Amendment right of free speech. Mr. Elster claimed he wanted to register the mark to convey a political message about the former president.

The Supreme Court reviewed the matter based on the initial refusal to register issued by the United States Patent & Trademark Office, which was then appealed to the U.S. Court of Appeals for the Federal Circuit, who overturned the refusal holding that barring registration of “Trump Too Small” under a provision of federal trademark law unconstitutionally restricted free speech. The Court’s ruling upholds the “living-individual rule” established under the Lanham Act which requires the consent of the living individual prior to registration. Specifically, “No trademark … shall be refused registration … on account of its nature unless it…[c]onsists of or comprises a name, portrait, or signature identifying a particular living individual except by his written consent….” 15 U.S.C. §1052(c). Proponents of the law, including the International Trademark Association, argue that this provision of trademark law is consistent with the concepts of the right of publicity and privacy, and assists in preventing the unauthorized use of individuals’ names in commercial contexts. In explaining the rationale for the decision, Justice Thomas wrote: “This Court has long recognized that a trademark protects the markholder’s reputation, and the connection is even stronger when the mark contains a person’s name,” and further stated, “This history and tradition is sufficient to conclude that the names clause — a content-based, but viewpoint-neutral, trademark restriction — is compatible with the First Amendment.”

It is worth noting the Court’s decision does not affect the ability of Mr. Elster to offer goods or services under any particular name or brand – in fact, Mr. Elster’s T-shirts bearing the phrase “Trump Too Small” are still available online for $24.99, even though his trademark application was refused. But the ruling does uphold the prohibition of seeking and obtaining federal trademark protection where the mark contains the name of a living individual without their consent. This ruling from the Supreme Court joins a string of other First Amendment challenges to provisions of the Lanham Act, the main statute governing trademarks. The high court in 2017 struck down a section of the law that barred registration of disparaging marks and did the same for a provision prohibiting immoral or scandalous marks in 2019.

The key takeaway from this narrowly tailored decision is that, prior to seeking federal trademark protection for a mark containing the name of a living individual, consent from that individual must be obtained. In the context of protecting a name or brand focused on a living individual, or in the continuation of such use post-merger or other transaction, it is important to ensure that the consent of the living individual is secured in some manner.

© Polsinelli PC, Polsinelli LLP in California

SBA Eliminates Self-Certification for SDVOSBs

The U.S. Small Business Administration (SBA) recently issued a direct final rule that eliminates self-certification for service-disabled veteran-owned small businesses (SDVOSBs). The SBA’s final rule — which implements a provision in the National Defense Authorization Act for Fiscal Year 2024 (NDAA 2024) — is effective August 5, 2024.

Background

  • To be awarded an SDVOSB set-aside or sole source contract, firms must be certified by SBA through the Veteran Small Business Certification (VetCert) Program.
  • Currently, firms that do not seek SDVOSB set-aside or sole source contracts but that meet the VetCert Program eligibility requirements may self-certify their SDVOSB status, receive prime contract or subcontract awards that are not SDVOSB set-aside or sole source contracts, and be counted toward an agency’s SDVOSB small business goals or a prime contractor’s subcontracting goal for SDVOSB awards.
  • Section 864 of the NDAA 2024 amends the SDVOSB requirements so that, effective October 1, 2024, each prime contract award and subcontract award counted for the purpose of meeting the goals for participation by SDVOSBs in procurement contracts for federal agencies or federal prime contractors shall be entered into with firms certified by VetCert under Section 36 of the Small Business Act (15 U.S.C. 657f).
  • Section 864 also creates a grace period so that firms that file an application for certification with SBA by December 22, 2024, may continue to self-certify for such federal government contracts and subcontracts until the SBA makes a final decision.
  • SDVOSBs that do not file an application for certification with SBA by December 22, 2024, or are not certified by SBA’s VetCert program and do not file an application by the deadline, will not be eligible to self-certify for such federal government contracts or subcontracts after December 22, 2024.
  • To implement the statutory language of Section 864 of the NDAA 2024, SBA is amending parts 125 and 128 of its regulations.

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© 2024 Bradley Arant Boult Cummings LLP
For more on Small Businesses, visit the NLR Corporate Business Organizations section.