Category: Administrative & Regulatory

Coca-Cola Sued For Deceptive Sustainability Claims

Last week, Coca-Cola was sued by Earth Island Institute for deceptive marketing regarding its sustainability efforts “despite being one of the largest contributors to plastic pollution in the world.”

In the Complaint, Earth Island Institute, a not-for-profit environmental organization, alleges that Coca-Cola is deceiving the public by marketing itself as sustainable and environmentally friendly while “polluting more than any other beverage company and actively working to prevent effective recycling measures in the U.S.” Coca-Cola has developed a number of initiatives to advertise its commitment to plastic waste reduction and recycling, in part through its “Every Bottle Back” and a “World Without Waste” campaigns. It touts its goal to collect and recycle one bottle or can for each one it sells by 2030. Coke also claims that its plastic bottles and caps are designed to be 100% recyclable. The Complaint presents a number of examples of these allegedly misleading statements across a range of mediums, including on its website, in advertising, on social media, and in other corporate reports and statements.

Meanwhile, according to the Complaint, Coca-Cola is the world’s leading plastic waste producer, generating 2.9 million tons of plastic waste per year. It uses about 200,000 plastic bottles per minute, amounting to about one-fifth of the world’s polyethylene terephthalate (PET) bottle output. This plastic production also relies on fossil fuels, resulting in significant CO2 emissions.

This waste generation is complicated by significant deficiencies in recycling. Despite the public’s common understanding that plastic bottles can be recycled, only about 30 percent of them actually are. According to the Complaint, the plastics industry has long understood this problem, but it has sought to convince the consumer that recycling is viable and results in waste reduction. The Complaint even quotes former president of the Plastics Industry Association as saying, “If the public thinks that recycling is working, then they are not going to be as concerned about the environment.”

The Complaint alleges that not only has Coca-Cola failed to implement an effective recycling strategy, it has actively opposed legislation that would improve recycling rates. According to the Complaint, Coke has actively fought against “bottle bills”—laws that would impose a small fee on plastic bottle purchase that would be returned to the consumer when that bottle is returned to a recycling facility. Jurisdictions with these laws tend to have better recycling rates, albeit at a small additional cost to the consumer at the point of purchase.

The Complaint does not allege that Coke has violated any environmental laws. Instead, Earth Island Institute seeks to hold Coke accountable under the Washington, D.C. Consumer Protection Procedures Act. The Complaint alleges that Coca-Cola’s misrepresentations mislead consumers, and that Coke’s products “lack the characteristics, benefits, standards, qualities, or grades” that are stated and implied in its marketing materials. Earth Island Institute does not seek damages; it only seeks to stop Coca-Cola from continuing to make these statements.

This case is the latest example of ESG—Environmental, Social, and Governance—factors playing out in practice.

Copyright © 2021 Robinson & Cole LLP. All rights reserved.
ARTICLE BY Megan Baroni of Robinson & Cole LLP
For more articles on Coca-Cola litigation, visit the NLR Litigation / Trial Practice section.

No Good Deed Goes Unpunished: Growing ESG Litigation Risks

Summary

Plaintiffs are inventing new theories to attack businesses for alleged ESG-related deficiencies.  Companies need to carefully manage their ESG initiatives, performance, and representations.

Introduction

Public companies are facing increased pressure to develop and publish goals around Environmental, Social and Governance (“ESG”) objectives. A number of groups and organizations have developed scoring metrics which attempt to grade companies on their ESG performance.  Private investor groups have added pressure by indicating they will invest their dollars in companies which meet certain criteria.  For example, in his January 2021 letter to CEO’s, Blackrock Investments’ Larry Fink wrote this:

Given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050. We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.

The Securities and Exchange Commission (“SEC”) has also weighed in, making the case for enhanced ESG disclosures.

More than 95% of the Fortune 50 now include some ESG disclosures in their SEC filings.  The topics on the rise in 2020 included Human Capital Management, Environmental, Corporate Culture, Ethical Business Practices, Board Oversight of E&S Issues, Social Impact and Shareholder Engagement.

Developing Litigation Trends

While the increased attention on ESG presents an opportunity for companies to showcase their good work, it also creates increased litigation risk.  These new challenges primarily fall into three areas: misrepresentations, unfair and deceptive trade practices, and securities fraud.

1. Misrepresentation & Breach of Warranty: Challenges to Misleading ESG Statements

While claims alleging defective products and labels are nothing new, the increased amount of publicly available ESG information has given plaintiffs’ attorneys new targets.  In Ruiz v. Darigold, Inc./Nw. Dairy Ass’n1, the dairy association highlighted the company’s social consciousness in a Social Responsibility Report.  Consumers sued stating they purchased the products in reliance on these statements, which plaintiffs contended were false.  The court dismissed the claims, finding that the statements were largely statements of opinion, and that “a reasonable consumer would not have interpreted the 2010 CSR as a promise that there were no problems at any of the 500+ dairies that make up the NDA or that Darigold’s products were generated by only healthy, happy, respected workers and cows.”2

The court reached a similar result in Nat. Consumers League v. Wal-Mart Stores, Inc.3, finding that Walmart’s “aspirational statements” were not actionable, although other claims based on detailed information about auditing programs could proceed.  The case settled before any final judgment.

After Chiquita made a number of marketing representations on its website regarding its environmentally safe business practices, including that it protects water sources by reforesting all affected natural watercourses it was sued by a non-profit.4  While the court dismissed a number of claims, the claims for unfair and deceptive trade practices and for breach of express warranty were allowed to proceed.

Governments have also asserted claims against companies which exaggerate their ESG accomplishments.  One decision which received considerable attention was brought by the Commonwealth of Massachusetts claiming that ExxonMobil had deceived both investors and consumers with a “greenwashing” campaign.5  Greenwashing refers to the practice of making false or misleading claims about sustainability or environmental compliance. The federal court declined jurisdiction, and sent the case back to Massachusetts state courts.

Another example is the 2019 settlement of an FTC complaint against Truly Organic, which advertised its product as vegan, even though they contained honey and lactose.  Truly Organic paid $1.76 million to settle the case.

2. Unfair and Deceptive Business Practices

Most states have laws designed to protect consumers from unfair and deceptive trade practices. These consumer protection laws can form the basis for greenwashing claims.6

In one landmark case, consumers brought a class action against Fiji Water, which marketed itself as carbon-negative and featured a green drop on the bottle.  After the trial court dismissed the case, plaintiffs appealed.  The California appeals court concluded that “no reasonable consumer would be misled to think that the green drop on Fiji water represents a third party organization’s endorsement or that Fiji Water is environmentally superior to that of the competition.7  This case has been cited hundreds of times by courts and commentators.8

In 2019, purchasers of StarKist tuna filed a class action alleging the company falsely claimed that its products were 100 percent “dolphin-safe” and sustainably sourced.  The court concluded that plaintiffs had stated a claim that StarKist’s fishing methods were not actually dolphin-safe.9  Discovery in this case is on-going, and the court recently required production of fishing records.10  Labels with claims such as “100 percent” are likely to draw similar attacks.

Keurig, which sells millions of disposable coffee pods, labeled some pods as “recyclable.”  Consumers sued, alleging that in fact the pods were not recyclable in a practical way.  The court concluded the claims were adequately pled under the reasonable consumer test.11  In September, 2020, the court granted class certification in the matter.12  This case serves a warning to be very careful about recycling claims.

In an even more recent case, California courts considered claims against Rust-Oleum, which marketed its products as “Non-Toxic” and “Earth Friendly.”  The court concluded that these terms were not deceptive as used, because there was a sufficient allegation that the products were harmful or damaging to the earth.  The Court rejected plaintiffs’ argument that the wording amounted to an environmental claim about the packaging.13

Like other unfair and deceptive acts and practices complaints, consumer claims of greenwashing may be enforced by the FTC pursuant to 15 U.S.C.A. § 45.  The FTC has published the Green Guides, 16 C.F.R. §§ 260.1 et seq., to assist manufacturers and retailers in avoiding making false or misleading claims about the environment benefits of products and/or services.  Failing to follow these guidelines are often cited by consumer plaintiffs as a basis for liability.

3. Securities Fraud Claims

Section 10-b of the Securities Exchange Act and SEC Rule 10b-5, which form the common legal grounds for claims of securities fraud, prohibit any false or misleading statement of material fact or omission of material fact in connection with the purchase or sale of any security.14   Liability potentially extends to individual officers and directors for ESG-related misstatements or omissions about which they knew or should have known.15

Shareholders frequently bring claims under the Securities Exchange Act for statements made by public companies.  In Ramirez v. Exxon Mobil Corp.16, the court found that the plaintiffs sufficiently alleged that: (i) the company made material misstatements regarding its use of proxy costs of carbon in formulating business and investment plans; (ii) the company made material misstatements concerning the financial implications of specific projects with climate change implications; and (iii) the defendants made the requisite statements with the scienter (i.e., intent to deceive) required for securities fraud claims.

Yum! Brands, which owns Taco Bell and KFC, made a number of statements regarding the importance of food safety and strict compliance with safety standards in their securities filings.  After news broke about several instances of food contamination, shareholders sued.  The court dismissed the claim, finding “a reasonable investor would pay little, if any, attention to Defendants’ statements concerning the quality of Yum!’s food safety program.  Those statements are vague and subjective, evidencing only the opinion of management, or derived from sources that are aspirational, rather than reliable.”17

On the other hand, statements about health and safety practices made by Transocean in SEC filings led the court to deny a motion to dismiss security fraud claims filed against that company following the Deepwater Horizon disaster.18  The case remains in litigation.  Another securities fraud case was filed against Brazilian mining company Vale after two dam collapses.  The plaintiffs alleged that the safety-focused statements in Vale’s SEC filings were deceptive.  Vale ultimately settled the case for $25 million.

Action Items

1. Carefully consider Voluntary Disclosures

All public disclosures create a risk of liability.  As a result, any non-mandatory disclosure must be carefully evaluated to determine whether the benefit of the disclosure outweighs the potential risk. Aspirational statements involve less risk than concrete statements and metrics, but the line between these is often blurred.  If the benefit justifies the risk, then the company must take affirmative steps to: (i) ensure the accuracy of the disclosure, (ii) prevent inconsistencies with other company disclosures; and (iii) evaluate which party should make the disclosure and the reporting framework.

2. Review the Green Guides and other FTC Guidance

The Green Guides were first issued in 1992 and were revised in 1996, 1998, and 2012.  They remain relevant today for companies looking for guidance.  A few items to pay particular attention to include:

  • Companies should avoid general environmental benefit claims, like the term “eco-friendly.”
  • Carbon offsets must be properly quantified, and companies must disclose if they are more than two years in the future.  Offsets required by law are not a “reduction.”
  • Claims about compostability, degradability and recyclability must be carefully documented.
  • Claims of “made with renewable energy” are often deceptive, because it can be difficult to prove where the energy actually came from, unless it is generated entirely within the same facility.

3. Evaluate which Sustainability Standard will be used

For many years, companies looked to GRI’s Sustainability Reporting Framework.  However, a number of new and different standards are emerging, including SASB, TCFD and the UN Global Goals.19  While a full review of these standards is beyond the scope of this article, companies should carefully select a standard for tracking and reporting and then be in a position to demonstrate compliance with those requirements.  Particular attention must be paid to disclosures around implementation, especially as it relates to supply chain impacts.

1 Ruiz v. Darigold, Inc./Nw. Dairy Ass’n, No. C14-1283RSL, 2014 WL 5599989, at *2 (W.D. Wash. Nov. 3, 2014)
2 2014 WL 5599989, at *6.
3 Nat. Consumers League v. Wal-Mart Stores, Inc., No. 2015 CA 007731 B, 2016 WL 4080541, at *1 (D.C. Super. July 22, 2016)
4 Water & Sanitation Health, Inc. v. Chiquita Brands Int’l, Inc., No. C14-10 RAJ, 2014 WL 2154381, at *1 (W.D. Wash. May 22, 2014).
5 Massachusetts v. Exxon Mobil Corp., 462 F. Supp. 3d 31, 38 (D. Mass. 2020).
6 See Cause of Action Under State Consumer Protective Law for “Greenwashing,” 79 Causes of Action 2d 323 (Originally published in 2017).
7 B. Hill v. Roll Internat. Corp., 195 Cal. App. 4th 1295, 1301, 128 Cal. Rptr. 3d 109, 113 (2011).
8 See, e.g. Jou v. Kimberly-Clark Corp., No. C-13-03075 JSC, 2013 WL 6491158, at *7 (N.D. Cal. Dec. 10, 2013) (concluding “pure & natural” was a sufficiently specific representation).
9 Gardner v. StarKist Co., 418 F. Supp. 3d 443, 449 (N.D. Cal. 2019).
10 Gardner v. Starkist Co., No. 19-CV-02561-WHO, 2021 WL 303426, at *5 (N.D. Cal. Jan. 29, 2021).
11 Smith v. Keurig Green Mountain, Inc., 393 F. Supp. 3d 837, 847 (N.D. Cal. 2019).
12 Smith v. Keurig Green Mountain, Inc., No. 18-CV-06690-HSG, 2020 WL 5630051, at *1 (N.D. Cal. Sept. 21, 2020).
13See Bush v. Rust-oleum Corp., 2020 WL 8917154 (N.D. Cal.).
14 15 U.S.C. §§78a et seq.
15 See Growing ESG Risks: The Rise of Litigation, 50 ELR 10849 (2020).
16 Ramirez v. Exxon Mobil Corp., 334 F. Supp. 3d 832 (N.D. Tex. 2018)
17 In re Yum! Brands, Inc. Sec. Litig., 73 F. Supp. 3d 846, 864 (W.D. Ky. 2014), aff’d sub nom. Bondali v. Yum! Brands, Inc., 620 F. App’x 483 (6th Cir. 2015).
18 In re BP P.L.C. Sec. Litig., No. 4:12-CV-1256, 2013 WL 6383968, at *1 (S.D. Tex. Dec. 5, 2013).
19 The ESG Movement: Why All Companies Need to Care, Womble Bond Dickinson (US) LLP and Pamela Cone

Copyright © 2021 Womble Bond Dickinson (US) LLP All Rights Reserved.

ARTICLE BY Mark P. Henriques of  Womble Bond Dickinson (US) LLP
For more articles on ESG litigation risks, visit the NLR Litigation / Trial Practice section.

Form I-9 Requirement COVID-19 Flexibility Extended until August 31

U.S. Immigration and Customs Enforcement (ICE) has announced an extension of its interim policy that allows employers to inspect the Form I-9 requirement virtually through August 31, 2021. This flexibility was first issued by ICE in March 2020, due to the pandemic, and has been extended multiple times since.

COVID-19 Flexibility Extended

Form I-9 flexibility policy was set to expire on May 31, 2021. The policy applies only to employers and workplaces that are operating remotely. If the workplace is functioning even partially at the work location, the employer must implement an in-person verification process. Employers who meet the criteria for remote operation must diligently create cases for their new hires within three business days from the date of hire.

The announcement had no new information apart from that regarding the extension but encouraged employers to monitor the USCIS website for any latest guidance.

Form I-9 Requirement

Form I-9 is a mandatory form that employers must complete and maintain with its records, confirming the employment authorization of individuals hired for employment in the United States. Employers must verify the documents of the new hire within three days of hire, and both employee and employer must complete the form. The list of acceptable documents can be found on the last page of the form.

The Department of Homeland Security (DHS) inspects, either randomly or on tips or complaints, the records the employers maintain. The purpose of the audit is to ensure that the employers are following legal hiring practices. When an employee receives a Notice of Inspection (NOI) from the DHS about an upcoming audit, it is best to hire an attorney and have staff from Human Resources handle the audit. If the DHS finds discrepancies in the records, they issue a warning notice and provide time to correct the violations. If the violations are not rectified, the DHS issues a Notice of Intent to Fine; often the amount of the fine is huge.

©2021 Norris McLaughlin P.A., All Rights Reserved

ARTICLE BY Raymond G. Lahoud of Norris McLaughlin P.A.
For more articles on form I-9, visit the NLRImmigration section.

Additional Guidance Issued for President Biden’s American Jobs and American Families Plan

Introduction

In April 2021, President Biden announced the “American Families Plan,” which included some significant tax law changes. Among the proposed changes included in the “American Families Plan” was the increase of the tax rate that would apply to long-term capital gains, significant limitations on the amount of gain that could be deferred on the sale of real estate under the like kind exchange rules of Section 1031 of the Internal Revenue Code (the “Code”) and a proposed tax event on certain investment assets that are transferred as a result of a death of the owner.

On May 28, 2021, the United State Department of Treasury issued a report entitled “General Explanation of the Administration’s Fiscal 2022 Revenue Proposals. Similar reports are issued each year by the Department of Treasury as part of the annual budget process and these reports are generally referred to as the “Green Book.” What is relevant is that the Green Book issued on May 28th included more details on tax law change previously proposed in President Biden’s “American Families Plan.”

A summary of the significant tax law changes proposed in the Green Book is below:

  1. Proposed Tax Law Change Applicable to Long-Term Capital Gains of Non-Corporation Taxpayers.

Entities that are taxable as C corporations for U.S. federal income tax purposes are subject to the same tax rate on taxable income regardless of whether the income is ordinary income or capital gain. In contrast, for individuals who recognize income directly or as a result of the flow through of items of income, gain, loss and deduction from a limited liability company or S corporation, a different tax rate will apply depending upon whether the income is ordinary income or capital gain.

In general, if an individual sells a capital asset that has been held for more than 12 months, the regular marginal rates referenced above do not apply and instead, tax is imposed at a rate of 20% on the excess of the amount realized on the sale over the seller’s tax basis in the asset. Because these gains are passive in nature, the net investment income tax of 3.8% will also apply.

Under the proposed tax law change set forth in the Green Book, gain arising from the sale of a capital asset that has been held for more than 12 months (i.e., a long-term capital gain) would be subject to U.S. federal income tax at ordinary income rates, with the top marginal rate of 37%. This proposed tax rate increase would apply only to the extent that the taxpayer’s income exceeds $1 million. As above, this threshold amount would be adjusted by the consumer price index that is used to index other tax rate thresholds. Under this proposal, if the sale was also subject to the 3.8% net investment income tax, the tax rate for U.S. federal tax purposes would be 40.8%.

  1. Proposed Tax Law Change Applicable to Marginal Income Tax Rate

The Green Book provides, somewhat cryptically, that the above-referenced tax increase would “be effective for gains required to be recognized after the date of announcement.” It is unclear if this retroactive effective date would be April 28th, the date President Biden first announced the capital gain rate proposal in the context of his “American Families Plan” proposal or if it means May 28th, the date the Green Book was released.

The TCJA changed the marginal tax brackets that applied to individuals for purposes of determining the U.S. federal income tax rate applicable to ordinary income. Under the TCJA, the top marginal tax rate for such income was lowered from 39.6% to 37% for income over $628,300 for married individuals filing a joint return (for 2021). The elimination of the 39.6% tax bracket under the TCJA was set to expire ono January 1, 2026.

The Green Book sets forth a change to the marginal tax rates to reinstate the 39.6% marginal tax rate and to have it apply to taxable income over $509,300 for married individuals filing a joint return for 2022. For future tax years, the $509,300 threshold would be adjusted by the consumer price index that is used to index other tax rate thresholds. The reinstatement of the 39.6% tax bracket and the lowering of the taxable income threshold for this top marginal rate would apply to taxable years beginning after December 31, 2021.

  1. Proposed Tax Law Change Increase to the Tax Rate Applicable to C Corporations.

The 2017 Tax Cuts and Jobs Act (the “TCJA”) eliminated the concept of marginal tax rates for entities that are treated as C corporations for U.S. federal income tax purposes. Under the TCJA, C corporations were subject to U.S. federal income tax at a flat rate of 21%. Under the proposal outlined in the Green Book, the elimination of marginal tax rates would continue but the rate of tax would be increased to a flat 28%.

According to the information set forth in the Green Book, this tax rate increase would apply for taxable years beginning after December 31, 2021. The Green Book includes a transition rule for corporations that have a taxable year that begins after January 1, 2021 and ends after December 31, 2021 which in effect requires the higher tax rate to apply to the portion of the taxable year that occurs in 2022.

  1. Proposed Tax Law Change to the Tax Treatment of Profits Interests.

Over the past several years, the tax treatment of “carried interests” has been the subject of much discussion. In general terms, a “carried interest” is structured as an interest in a limited liability company or limited partnership and is granted to service providers. From a tax perspective, the “carried interest” is designed to qualify as a profits interest for U.S. federal income tax purposes so that it is tax free to the recipient on issuance. The perceived abuse is that in many cases, when distributions are made on the “carried interests” the character of the gain that flows through is capital gain rather than ordinary income (as would be the case if the payment was directly in exchange for services).

In 2017, the TCJA amended the Code to include Section 1061 to impose new tax rules on carried interest that would impose ordinary income treatment if the carried interest was held less than three years. Under the TCJA, this three-year holding period required did not apply to certain real estate partnerships.

Under the proposal outlined in the Green Book, the rules applicable to “carried interests” would again be changed to provide that any amount allocated to an investment services partnership interest (an “ISPI”) would be subject to tax at ordinary rates regardless of the character of the gain at the partnership level. Under this proposal, the gain arising from the disposition of an ISPI would likewise be treated as ordinary income, regardless of how long the interest was held. The income allocated in respect to an IPSI would also be subject to SECA, notwithstanding whether the interest was a limited partnership interest that is otherwise exempt from SECA or a non-manager interest in an LLC. This ordinary income treatment would apply only if the individual’s income from all sources exceeded $400,000.

For purposes of this proposed tax law change, an ISPI would be defined as an interest in a limited liability company or partnership held by a person that provides services to the entity and (i) substantially of the entity’s assets are investment-type assets, such as securities and real estate and (ii) over half of the entity’s contributed capital is from partners in whose hands the interest constitutes property not held in connection with the conduct of a trade or business. The proposal sets forth special rules that allow an interest in a limited liability company or partner held by a service provided to avoid ISPI treatment if the partner contributed capital in exchange for the interest and the interest is subject to substantially the same terms as interests issued to non-service providers. An interest will not qualify under this “invested capital” exception if the capital contribution is funded by a loan or advance guaranteed by another partner.

The proposal would repeal Code Section 1061 and would be effective for taxable years beginning after December 31, 2021 (even if the interest was granted prior to this date).

  1. Proposed Tax Law Change to the Deferral of Gain on the Sale of Real Estate under the Like Kind Exchange Rules.

Section 1031 of the Code allows a taxpayer to avoid the current recognition of taxable gain on the sale of property by engaging in a like kind exchange. In 2017, the TCJA amended Section 1031 to limit application of the like kind exchange rules to real property.

The proposal set forth in the Green Book would further restrict the application of Section 1031 by limiting the amount of gain that could be deferred in a like kind exchange to $500,000 ($1,000,000 for married individuals filing a joint return). As drafted, it is unclear how this limitation would apply to REITs or property held by an entity that is taxable as a C corporation. The assumption is that the $500,000 would apply to these entities but this is not entirely clear.

The new limitation would apply to exchanges occurring after December 31, 2021.

  1. Proposed Tax Law Change Applicable to the New Requirement to Recognize Long-Term Capital Gains for Assets Held at Death or Transferred During Lifetime.

In general, the current tax laws provide that the recipient’s basis of property acquired at death is the fair market value of those assets as of the decedent’s date of death. The recipient’s basis of property acquired by gift is the same as the donor’s basis as of the date of such gift. There is no realization event when property is acquired at death or via gift, unless and until that property is subsequently sold (and any gain would be determined based on the recipient’s adjusted basis).

Under the current proposal outlined in the Green Book, there will be a realization of capital gains to the extent such gains are in excess of a $1 million exclusion per person, upon the transfer of appreciated assets at death or by a gift, including transfers to and distributions from irrevocable trusts and partnerships. The proposal would provide various exclusions and exceptions for certain family-owned and operated businesses.

In addition, gains on unrealized appreciation will be recognized by a trust, partnership or other non-corporate entity at the end of an applicable 90-year “testing period” if that property has not been the subject of a recognition event during that testing period. The 90-year testing period for property begins on the later of January 1, 1940 or the date the property was originally acquired, with the first possible recognition event to take place on December 31, 2030.

Under the proposal outlined in the Green Book, realized gains at death could be paid over 15 years (unless the gains are from liquid assets such as publicly traded securities). There would be no gain recognition for transfers to U.S. spouses or charities at death. The Green Book states the effective date of the above-referenced changes would be effective for property transferred by gift, and property owned at death by decedents dying, after December 31, 2021.

  1. Proposed Tax Law Change to Expand Income Subject to the Net Investment Income Tax or SECA Tax.

Under current tax law, individuals filing joint returns that have taxable income in excess of $250,000 are subject to the 3.8% net investment income tax. In general, the net investment income tax applies only to the following categories of income and gain: (i) interest, dividends, rents, annuities and royalties, (ii) income derived from a trade or business in which the individual does not materially participate and (iii) net gain from the disposition of property (other than property held for use in a business in which the individual materially participates).

The net investment income tax does not apply to self-employment earnings. However, self-employment earnings are subject to self-employment tax (“SECA”). Under Section 1402 of the Code, limited partners are statutorily exempt from SECA, as are shareholders of an S corporation on the flow through of income from the S corporation. In general, the statutory exclusion of limited partners from SECA has been widely interpreted to also exclude members of limited liability companies from SECA.

The Green Book notes that depending upon the type of business entity used, active owners of a business can be treated differently under the net investment income tax and SECA and there are circumstance in which an active owner of a business can legally avoid the imposition of both the net investment income tax and SECA. To address this perceived abuse, the Green Book sets forth a proposal designed to ensure that all trade or business income is subject to an additional 3.8% tax either through the net investment income tax or SECA. Specifically, if an individual had adjusted gross income of more than $400,000, the net investment income tax would apply to all income and gain from a business that was not otherwise subject to SECA (or regular employment taxes).

The proposal also includes a change to the scope of SECA. Under this proposal, all individuals who provide services and materially participate in a partnership or a limited liability company would be subject to SECA on their distributive share of income that flows through from the entity. In addition, under this proposed tax law change, a shareholder of an S corporation that materially participated in the business of the S corporation would be subject to SECA on their distributive share of income that flows through from the entity.

The exemptions from SECA for rents, dividends, capital gains and certain other income would continue to apply. Nonetheless, both of these proposed tax law changes to the net investment income tax and SECA would have the effect of a 3.8% tax rate increase on all income from a business regardless of whether it was conducted through a sole proprietorship, a limited liability company, a partnership or an S corporation. The Green Book states that the effective date of the above-referenced changes would be for tax years beginning after December 31, 2021.

  1. Proposed Tax Law Change to the Extend the Excess Business Loss Deduction Limitations.

The TCJA added Section 461(l) to the Code to impose a limitation on the amount of loss from a pass-through business entity that can be used by a taxpayer to offset other income. As currently in force, this limitation applied to non-corporate taxpayers for tax years beginning after December 31, 2020 through 2027.

This limitation applies to “excess business losses” which are defined as the excess of losses from a business activity over the sum of (x) the gains from the business activities and (y) $524,000 for married individuals filing a joint return. This threshold amount is indexed for inflation. The determination of whether there is an “excess business loss” is determined at the individual level rather than on an entity by entity basis. As a result, all losses and gains attributable to a business are aggregated for purposes of applying the loss limitation.

Under the proposal set forth in the Green Book, this limitation would not expire after 2027 but would be permanent.

  1. Proposed Tax Law Change to Require Financial Institutions to Provide Comprehensive Financial Account Information to the IRS Through 1099 Reporting.

The IRS has estimated that the tax gap for business income is $166 billion per year. The IRS believes the primary cause of this tax gap is a lack of comprehensive information reporting and the resulting difficulty identifying noncompliance outside of an audit. In order to decrease the business income tax gap, it is purposed that the IRS will require comprehensive reporting on the inflows and outflows of financial accounts.

Pursuant to the proposal, financial institutions would report data on financial accounts on informational returns, which would report gross inflows and outflows from the accounts. Further, the information return would breakdown the amount of physical cash, any transactions with foreign accounts, and transfers to and from related party accounts. This regime would apply to all business and personal accounts held with financial institutions, including bank, loan, and investment accounts. It is further proposed that payment settlement entities would continue to report gross receipts on Form 1099-K, but would also report gross purchases, physical cash, payments to foreign accounts, and transfer inflows and outflows on its payee accounts. Similar reporting would also apply to cryptocurrency.

The proposal would be effective for tax years beginning after December 31, 2022.

  1. Fifteen Percent Minimum Tax on Book Earnings of Large Corporations

The Green Book expresses concern about reducing the disparity between the income reported by large corporations on their federal income tax returns and the profits reported to shareholders in financial statements. Accordingly, it proposes to impose a 15% minimum tax on worldwide book income for corporations with such income in excess of $2 billion. Taxpayers would calculate book tentative minimum tax equal to 15% of worldwide pre-tax book income less certain tax credits. The book income tax equals the excess, if any, of tentative minimum tax over regular tax. The proposal would be effective for taxable years beginning after December 31, 2021.

  1. Proposed Changes to Global Intangible Low-Taxed Income (“GILTI”)

The TCJA enacted the GILTI rules as a sort of minimum tax on earnings of controlled foreign corporations (“CFC’s”). A U.S. shareholder’s GILTI inclusion is determined by combining its pro rata share of the tested income and tested loss of all its CFCs. Tested income is the excess of certain gross income of the CFC over the deductions of the CFC that are properly allocable to the CFC’s gross tested income. However, this inclusion is reduced by a deemed 10% return on depreciable tangible property of the CFC (referred to as qualified business asset income, or “QBAI”).

In addition, a corporate U.S. shareholder is generally allowed a 50% deduction against its GILTI inclusion. Further, for corporate U.S. shareholders, 80% of foreign corporate income taxes attributable to GILTI may be allowed as a foreign tax credit. Finally, Treasury Regulations provide that if the foreign effective tax rate on the gross income of a CFC exceeds 90% of the U.S. corporate income tax rate, the U.S. shareholder of the CFC is generally permitted to exclude that gross income (and the associated deductions and foreign income taxes) from its GILTI inclusion.

The Green Book proposal would make several changes to these rules. First, the QBAI exemption would be eliminated, so that the U.S. shareholder’s entire CFC tested income would be subject to U.S. tax. Second, the section 250 deduction for a global minimum tax inclusion would be reduced to 25%. Given the increased corporate tax rate, the GILTI tax rate would generally increase to 21% (disregarding the effect of any available foreign tax credits). Third, the averaging method for calculating a U.S. shareholder’s GILTI inclusion would be replaced with a per country rule. Under this standard, a U.S. shareholder’s GILTI inclusion would be determined separately for each foreign jurisdiction in which its CFCs have operations. Concomitantly, a separate foreign tax credit limitation would be required for each foreign jurisdiction. Finally, the proposal would repeal the high tax exemption (for both GILTI income and subpart F income). These proposals would be effective for taxable years beginning after December 31, 2021.

Taken together, these changes will substantially increase the tax rate of many U.S. multinationals on foreign income. The Green Book proposals essentially enact a full inclusion regime, which is exacerbated by the inability of U.S. shareholders to offset losses in one country against income in another. Further, the increased tax rate resulting from the combination of an increased corporate tax rate and reduced GILTI deduction coupled with the per-country limitations on foreign tax credits will substantially increase some taxpayers’ effective tax rates on foreign income.

  1. Enact New Limitations on Corporate Tax Base Erosion

    1. Elimination of Foreign-Derived Intangible Income (“FDII”) Provisions

The FDII provisions (also a TCJA enactment) were intended to encourage exports of intangible property and services. Very generally, FDII is the excess of the taxpayer’s income from certain U.S. sources derived in connection with property or services that are sold by the taxpayer to a foreign person for a foreign use over the amount of QBAI used to produce such property.

Believing that FDII is not an effective way to encourage research and development (R&D) in the United States, rewards prior innovation rather than incentivizing new R&D and incentives companies to offshore manufacturing, the Green Book proposes to repeal FDII in its entirety. The Green Book indicates that the resulting revenue will be used to incentivize R&D in the United States but provides no details on how this will be done. The repeal would be effective for taxable years beginning after December 31, 2021.

  1. Repeal of Base Erosion Anti-Abuse Tax (“BEAT”); Enactment of Stopping Harmful Inversions and Ending Low-Tax Developments (“SHIELD”) Law

The BEAT was another TCJA innovation. Under the BEAT rules, a minimum tax was imposed on certain large corporate taxpayers that also make deductible payments to foreign related parties above a specified threshold. A taxpayer’s BEAT liability is computed by reference to the taxpayer’s modified taxable income and comparing the resulting amount to the taxpayer’s regular tax liability. The taxpayer’s BEAT liability generally equals the difference, if any, between 10% of the taxpayer’s modified taxable income and the taxpayer’s regular tax liability.

The Green Book proposal would repeal the BEAT and replace it with a new rule referred to as SHIELD. Under SHIELD, a deduction (whether related or unrelated party deductions) would be disallowed to a domestic corporation or branch, in whole or in part, by reference to all gross payments that are made (or deemed made) to “low-taxed members,” which is any financial reporting group member whose income is subject to an effective tax rate that is below a designated minimum tax rate. The designated minimum tax rate will be determined by reference to a rate agreed to under one of the pillars of the Base Erosion and Profit Shifting plan put forth by the OECD. If SHIELD is in effect before agreement has been reached, the designated minimum tax rate trigger will be 21%.

A financial reporting group is any group of business entities that prepares consolidated financial statements and that includes at least one domestic corporation, domestic partnership, or foreign entity with a U.S. trade or business. Consolidated financial statements means those determined in accordance with U.S. GAAP, IFRS or another method authorized by the Treasury Department. A financial reporting group member’s effective tax rate is determined based on the members’ separate financial statements on a jurisdiction by jurisdiction basis. Payments made by a domestic corporation or branch directly to low-tax members would be subject to the SHIELD rule in their entirety. Payments made to financial reporting group members that are not low-tax members would be partially subject to the SHIELD rule based on the aggregate ratio of the financial reporting group’s low-taxed profits to its total profits.

The proposal provides authority for the Secretary to exempt from SHIELD payments in respect of financial reporting groups that meet, on a jurisdiction-by-jurisdiction basis, a minimum effective level of tax. The SHIELD rule would apply to financial reporting groups with greater than $500 million in global annual revenues and would be effective for taxable years beginning after December 31, 2022.

  1. New Deduction Limitations on Disproportionate United States Borrowings.

The Green Book expresses concern that under current law multinational groups are able to reduce their U.S. tax on income earned from U.S. operations by over-leveraging their U.S. operations relative to those located in lower-tax jurisdictions. Under the proposal, a financial reporting group member’s deduction for interest expense generally would be limited if the member has net interest expense for U.S. tax purposes and the member’s net interest expense for financial reporting purposes (computed on a separate company basis) exceeds the member’s proportionate share of the group’s net interest expense reported on the group’s consolidated financial statements. A member’s proportionate share of the financial reporting group’s net interest expense would be determined based on the member’s proportionate share of the group’s earnings (computed by adding back net interest expense, tax expense, depreciation, depletion, and amortization) reflected in the financial reporting group’s consolidated financial statements.

When a financial reporting group member has excess financial statement net interest expense, a deduction will be disallowed for the member’s excess net interest expense for U.S. tax purposes. For this purpose, the member’s excess net interest expense equals the member’s net interest expense for U.S. tax purposes multiplied by the ratio of the member’s excess financial statement net interest expense to the member’s net interest expense for financial reporting purposes. However, certain financial services entities would be excluded from the financial reporting group. Further, the proposal would not apply to financial reporting groups that would otherwise report less than $5 million of net interest expense, in the aggregate, on one or more U.S. income tax returns for a taxable year.

A member of a financial reporting group that is subject to the proposal would continue to be subject to the application of thin capitalization rules (section 163(j)). Thus, the amount of interest expense disallowed for a taxable year of a taxpayer that is subject to both interest expense disallowance provisions would be determined based on whichever of the two provisions imposes the lower limitation. A member of a financial reporting group may also be subject to the Shield rule, discussed above.

The continued proliferation of interest deduction limitations is likely to be of concern to multinational groups that would now need to consider not only the application of debt-equity rules and thin capitalization rules but also the rules on disproportionate United States borrowings and, possibly, the SHIELD rules. Further, as lenders often want to lend to the parent of multinational groups (and those groups often want to maximize their borrowing capacity), it is typical for a U.S. parented multinational to be the primary borrower and cause its foreign subsidiaries to guarantee the debt obligation. The proposed limitation on disproportionate United States borrowings may force those borrowers to seek ways to introduce leverage into their foreign subsidiaries or cause these subsidiaries to become co-borrowers. However, doing so may require running the gauntlet of interest deduction limitations, withholding taxes and foreign exchange requirements in numerous countries.

  1. Provide New Business Credit for On-Shoring a U.S. Trade or Business

The proposal would create a new general business credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. For this purpose, onshoring a U.S. trade or business means reducing or eliminating a trade or business currently conducted outside the United States and starting up, expanding, or otherwise moving the same trade or business to a location within the United States, to the extent that this action results in an increase in U.S. jobs. In addition, the proposal would disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business.

Jeffrey M. Glogower and Brandon Bickerton contributed to this article. 

© Polsinelli PC, Polsinelli LLP in California
ARTICLE BY William J. Sanders, D. Scott Lindstrom,
Edward J. Hannon, John T. Woodruff, Stephen J. Bahr and Adam W. Randle of  Polsinelli PC
For more articles on Biden’s American Jobs and American Families Plan, visit the NLRAdministrative & Regulatory section.

Class Action Following Ransomware Attack on Colonial Pipeline

Last week we posted about a ransomware attack on the American Colonial Pipeline Company. This week, the Company has been hit with a class action alleging that a range of US businesses and consumers suffered loss as a result of Colonial Pipeline’s decision to cut its supply of fuel until the ransomware attack was resolved. Meanwhile, the Company is still not entirely back on track – Colonial’s main website is still offline.

The class action is open to all fuel consumers who were impacted by the closure of the pipeline across the east coast which includes a range of businesses that rely on fuel (such as airlines and trucking companies) as well as ordinary retail consumers.

Reuters reported that 88% of petrol stations were out of fuel in Washington, 65% in North Carolina, while in South Carolina, Georgia and Virginia, just under 50% were without fuel.

One of the points that will be considered in the case is whether Colonial actually needed to close the pipeline – it’s been suggested that the pipeline could have been left open and that the Company could have reversed billed its customers based on estimated usage.  The ransomware hack was one of the most disruptive attacks on critical infrastructure that the US has ever experienced and it will be hard to determine whether Colonial’s decision to ‘turn off’ its pipeline was necessary to contain the breach or not.

Colonial has already paid a $US4.4 million (~$5.7m AUD) ransom to the hacking group DarkSide and if this action is successful, it could stand to lose hundreds of millions more. Flow on effects of attacks on critical infrastructure clearly have the potential to seriously damage businesses and the economy generally.  Even the cost of defending litigation makes the cost of a security breach much higher than merely paying a ransom.

Jacqueline Patishman also contributed to this article.

Copyright 2021 K & L Gates

ARTICLE BY Cameron Abbott of K&L Gates
For more articles on ransomware, visit the NLRCorporate & Business Organizations section.

Supreme Court Update: Van Buren v. United States (No. 19-783), United States v. Cooley (No. 19-1414), Garland v. Ming Dai (No. 19-1155)

Greetings, Court Fans!

Three more opinions this week, as The Nine continue to chip away at OT20’s remaining backlog. Most notably, in Van Buren v. United States (No. 19-783), an interesting mix (no scare-quotes this time, as it actually is a unique line-up) led by Justice Barrett concluded that the Computer Fraud and Abuse Act (CFAA) does not apply to all individuals who misuse authorized access to a computer, but only to those who exceed their authorized access by obtaining information located in particular files, folders, or databases that are off-limits to him. We’ll have more on yesterday’s decision in Van Buren, the first major case dealing with the CFAA, next time. For now, read on for summaries of United States v. Cooley (No. 19-1414), which held that tribal police officers have authority to detain and search non-Indian persons on public rights-of-way within reservations, and Garland v. Ming Dai (No. 19-1155), which rejected a Ninth Circuit rule that courts reviewing orders denying asylum applications must a treat noncitizen’s testimony as credible in the absence of express adverse credibility findings.

United States v. Cooley (No. 19-1414) addresses the power of tribal police officers to temporarily detain and search non-Indians within reservations. In a unanimous opinion, the Court held that tribal authorities retain fairly broad power to detain and search provided it is necessary to preserve the health and welfare of the tribe.

The case began when Officer James Saylor of the Crow Police Department approached a truck parked on U.S. Highway 212, which runs through the Crow Reservation in Montana. Saylor questioned the driver, Joshua James Cooley, and observed that he appeared to be non-native and had watery, bloodshot eyes. He also happened to notice two semiautomatic rifles on the front seat. Fearing violence, Saylor ordered Cooley out of the car and conducted a pat-down search, during which he found drugs. After Cooley was indicted in federal court on gun and drug charges, the District Court granted Cooley’s motion to suppress the drug evidence on the ground that Saylor lacked authority to detain and search Cooley, a non-Indian. The Ninth Circuit affirmed, concluding that tribal police officers can stop and detain non-Indian suspects but only if they first try to determine whether the suspect is non-Indian and, in the course of doing so, find an apparent violation of state and federal law. Because Saylor didn’t inquire whether Cooley was a non-Indian, the Ninth Circuit found the search invalid.

The Supreme Court unanimously reversed, in a decision by Justice Breyer. Breyer acknowledged that, as a “general proposition,” the inherent sovereign powers of an Indian tribe do not extend to nonmembers of the tribe. But there are two exceptions to that rule, one of which “fits the present case, almost like a glove”: A tribe retains inherent power to exercise civil authority over the conduct of non-Indians on lands within its reservation “when that conduct threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe.” Here, Saylor acted to preserve the health and welfare of the tribe, which he reasonably thought might be imperiled if Cooley—apparently drunk and armed—was let alone. Breyer approvingly cited several state court decisions recognizing that tribal police must have the power to detain drunk drivers, for example, as well as the Court’s own decisions permitting tribal police to detain suspects for the purpose of transporting them to proper authorities. Though the Ninth Circuit gave lip service to this authority (and the need for tribal police to preserve the health and welfare of the tribe), its standard is unworkable. If tribal police could only detain suspects for violations observed in the course of determining whether they’re tribe members, it would give actual tribe members an incentive to lie and claim to be non-Indian. And permitting officers to detain and search only in connection with “apparent” legal violations would introduce a new standard into general search-and-seizure law, and with it new interpretation problems.

Justice Alito penned a brief concurrence explaining that he joined the Court’s opinion “on the understanding that it holds no more than the following: On a public right-of-way that traverses an Indian reservation and is primarily controlled by tribal police, a tribal police offer has the authority to (a) stop a non-Indian motorist if the officer has reasonable suspicion that the motorist may violate or has violated federal or state law, (b) conduct a search to the extent necessary to protect himself or others, and (c) if the tribal officer has probable cause, detain the motorist for the period of time reasonably necessary for a non-tribal officer to arrive on the scene.” Whether lower courts will also share that understanding (considering Alito’s vote was not necessary to the judgment) remains to be seen.

Next up, in Garland v. Ming Dai (No. 19-1155), Justice Gorsuch led a unanimous Court in scrapping a longstanding Ninth Circuit immigration rule that, in the absence of an explicit adverse credibility determination by an immigration judge or the Board of Immigration Appeals, a reviewing court must treat a noncitizen’s testimony as credible and true. Agreeing with numerous Ninth Circuit judges who’ve objected to the rule, Justice Gorsuch concluded that it has no place in a reviewing court’s analysis. While there is a rebuttable presumption of credibility in appeals, judicial proceedings in immigration cases are not “appeals.” Under the INA, the “sole and exclusive means for judicial review of an order of removal” is through a “petition for review,” not an “appeal.” Therefore, while a presumption of credibility might arise in appeals from immigration judges to the BIA, there is no such presumption in the antecedent proceedings before the immigration judge, or in subsequent petitions for review before a federal court. Enough said.

© 1998-2021 Wiggin and Dana LLP

ARTICLE BY Tadhg A.J. Dooley and David Roth of Wiggin and Dana LLP
For more articles on SCOTUS, visit the NLRLitigation / Trial Practice section.

The College Athlete Right to Organize Act – Labor Unions Enter the Pay-for-Play Debate

The debate about compensating college athletes has presented itself in many forms recently, including a recent argument before the United States Supreme Court. As that notion gains momentum, U.S. legislators have stepped in by presenting legislation to ensure that labor organizations have their place at the table. On May 27, 2021, Senators Chris Murphy (D-CT) and Bernie Sanders (I-VT) and several members of the House of Representatives introduced legislation that would extend collective bargaining rights and the other protections of the National Labor Relations Act (NLRA or Act) to any athlete who receives any form of compensation from their public or private college or university and is required to participate in an intercollegiate sport. They call it the “College Athlete Right to Organize Act.”

The 2014 Union Petition by Northwestern Football Players

This legislation is not the first attempt to gain bargaining rights for college athletes. In 2014, members of Northwestern University’s football term filed a petition with the National Labor Relations Board (Board) asking that the University recognize the College Athletes Players Association as their exclusive representative for purposes of bargaining. While the Regional Director, Peter Sung Ohr (who is now the Board’s Acting General Counsel), agreed that players who receive scholarships are employees entitled to the rights and protections of the NLRA, the Board declined to assert jurisdiction. It did so without deciding whether the players are employees under the Act. In part, the Board declined because it does not have jurisdiction over public institutions, meaning that it maintains jurisdiction over only 17 of the 125 colleges and universities that participate in the same football division as Northwestern. The others are public institutions exempt from the Act.

The College Athlete Right to Organize Act Declares College Athletes Common Law Employees and Would Cover Both Private and Public Universities

The College Athlete Right to Organize Act addresses both of those issues. First, after denouncing the NCAA and its member institutions’ practices as “exploitive and unfair,” the College Athlete Right to Organize Act broadly declares that college athletes meet the common law definition of an “employee” because they “perform a valuable service… under a contract for hire in the form of grant-in-aid agreement.” Second, and more significant, the Act extends the NLRA to public institutions of higher education with respect to the employment of college athletes. Currently, the NLRA broadly excludes government entities.

Mandatory Multiemployer Bargaining Within an Athletic Conference

The College Athlete Right to Organize Act also introduces multiemployer bargaining as a matter of right by stating that “college athletes must be able to form collective bargaining units across institutions of higher education that compete against each other.” Thus, the College Athlete Right to Organize Act provides that the “Board shall recognize multiple institutions of higher education within an intercollegiate athletic conference as a multiemployer bargaining unit, but only if consented to by the employee representatives” of the players, meaning that multiemployer bargaining may proceed without the consent and over the objection of the colleges and universities. This change could have significant implications for colleges and universities operating within the same athletic conference, as it would require institutions with different resources, priorities and goals to approach negotiations with players in a generally uniform manner, which may not be suitable for a particular institution.

The Act’s Future

Whether the College Athlete Right to Organize Act gains any momentum remains to be seen. What’s clear is that debate around the issue of compensating college athletes is intensifying. As that debate matures, it seems that at least some legislators want to ensure that labor unions have a seat at the table.

Copyright © 2021 Robinson & Cole LLP. All rights reserved.

ARTICLE BY Natale V. Di Natale and Emily A. Zaklukiewicz of Robinson & Cole LLP
For more articles on college sports, visit the NLREntertainment, Art & Sports section.

President Biden’s FY 2022 Budget Request Includes $11.2 Billion For EPA

On May 28, 2021, the Biden-Harris Administration submitted President Joseph Biden’s budget for fiscal year 2022 (FY 2022) to Congress. According to EPA’s May 28, 2021, press release, the budget request advances “key EPA priorities, including tackling climate change, advancing environmental justice, protecting public health, improving infrastructure, creating jobs, and supporting and rebuilding the EPA workforce.” The President’s FY 2022 budget request supports:

  • Rebuilding Infrastructure and Creating Jobs: The budget provides $882 million for the Superfund Remedial program to clean up some of the nation’s most contaminated land, reduce emissions of toxic substances and greenhouse gases (GHG) from existing and abandoned infrastructure, and respond to environmental emergencies, oil spills, and natural disasters;
  • Protecting Public Health: The budget includes $75 million to accelerate toxicity studies and fund research to inform the regulatory developments of designating per- and polyfluoroalkyl substances (PFAS) as hazardous substances while setting enforceable limits for PFAS. In FY 2022, EPA will advance public health by providing an additional $15 million and 87 full-time equivalent employees (FTE) to build agency capacity in managing chemical safety and toxic substances under the Toxic Substances Control Act (TSCA);
  • Tackling the Climate Crisis with the Urgency Science Demands: The FY 2022 budget recognizes the opportunity in tackling the climate crisis by developing the technologies and solutions that will drive new markets and create good paying jobs. The budget restores the Air, Climate, and Energy Research Program and increases base funding by more than $60 million, including $30 million for breakthrough research through the Advanced Research Projects Agency-Climate (ARPA-C) with DOE. The budget provides an additional $6.1 million and 14 FTEs to implement the recently enacted American Innovation and Manufacturing (AIM) Act and reduce potent GHGs while supporting new manufacturing in the United States;
  • Advancing Environmental Justice and Civil Rights: The budget includes more than $900 million in investments for environmental justice-related work, collectively known as EPA’s Accelerating Environmental and Economic Justice Initiative, elevating environmental justice as a top priority across the agency. The budget also proposes a new national program dedicated to environmental justice to further that goal;
  • Supporting States, Tribes, and Regional Offices: Almost half of the total budget, $5.1 billion, will support states, tribes, and localities through the State and Tribal Assistance Grants account;
    • Prioritizing Science and Enhancing the Workforce: The FY 2022 budget includes an increase of 1,026 FTEs “to stop the downward slide in the size of EPA’s workforce in recent years to better meet the mission.” Within this increase are 114 FTEs to propel and expand EPA’s research programs to ensure the agency has the science programs that communities demand from EPA. Also included are 86 additional FTEs to support the criminal and civil enforcement programs to ensure that environmental laws are followed.
    ©2021 Bergeson & Campbell, P.C.
ARTICLE BY Lynn L. Bergeson of Bergeson & Campbell, P.C.
For more articles on the Biden Administration, visit the NLR Administrative & Regulatory section. 

White House to Business: “Take Ransomware Crime Seriously”

As we come out of the COVID-19 pandemic, it appears that another type of infection is threatening business and ransomware continues to spread.

  • Colonial Pipeline
  • JBS (world’s largest meatpacking company)
  • Massachusetts Steamship Authority
  • Scripps Health
  • City of Tulsa

A roll call of entities suffering major ransomware attacks just in the few weeks.    After the Colonial Pipeline attack, President Biden issued an Executive Order establishing some baselines for cybersecurity with respect to government contracts and improving detection of cybersecurity incidents on federal government networks, among other things.   The White House has now issued a rare “wake-up call” to private business in the form of an open letter “to corporate executives and business leaders.”

Deputy National Security Advisor for Cyber and Emerging Technology Anne Neuberger wrote that while the Biden administration has placed an emphasis on resilience, the “private sector has a distinct and key responsibility.”

“All organizations must recognize that no company is safe from being targeted by ransomware, regardless of size or location.  But there are immediate steps you can take to protect yourself, as well as your customers and the broader economy.”   Neuberger continued that private companies that “view ransomware as a threat to their core business operations rather than a simple risk of data theft will react and recover more effectively.”

The letter encourages business to do what regular readers of this blog, or attendees at our webinar events, have heard for many years:  understand your business risk, convene leadership teams to discuss the ransomware threat, and review corporate security posture and business continuity plans.

Neuberger’s letter highlights best practices to help defend against ransomware attacks:

  • Implement the best practices from the President’s Cybersecurity Executive Order
    • Prevent Intrusion (Section 3 – multi-factor authentication)
    • Minimize impact of intrusion pre-detection (Section 3 – data encryption, zero-trust environment)
    • Detect and respond to intrusion (Section 6 – incident response playbook, Section 7 – endpoint detection and response, centralized threat-hunting, Section 8 – logging)
    • Learning (and disseminating) lessons from intrusion
  • Backup your data, system images, and configurations, and keep the backups offline
  • Regularly test your data resiliency
  • Update and patch systems promptly
  • Test your incident response plan (do you have one?)
  • Check your security team’s work using a third party pen tester
  • Segment your networks

In April, the Federal Trade Commission published a Business Blog post entitled “Corporate boards:  don’t underestimate your role in data security oversight”   This piece, combined with today’s open letter from the White House, should be mandatory reading for board members.   The need for proactive and preventative measures increases by the day.   We can assist with a wide range of activities, including:

  • Cyber Risk Assessment/Management
  • Employee Training
  • Incident Response Planning
  • Disaster Recovery/Resiliency Planning
  • Cyber Liability Insurance Placement

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

ARTICLE BY Cynthia J. Larose of Mintz
For more articles on cybersecurity, visit the NLRCommunications, Media & Internet section.

The Elements of Your COVID-19 Voluntary Vaccine Policy

About half of the U.S. working age, vaccine-eligible population has now been vaccinated, according to Centers for Disease Control and Prevention (“CDC”) tracking data.  New CDC guidelines allow the fully vaccinated to unmask, except were applicable law or private businesses and workplaces say otherwise.

If that was supposed to be an incentive, it has yet to kick in.  COVID-19 vaccination rates are slowing considerably. There is growing concern for getting everyone safely back to work—and soon— especially among small- to mid-size employers still emerging from the pandemic.

Making vaccinations mandatory is technically an option, but many employers don’t want to go there, and an increasing number of  states are in the process of banning it anyway.  Thus, there is no shortage of ideas for incentivizing employees to get the shot—from on-site opportunities to extra vacation days, and employers are ardent for knowledge about which employees have already been vaccinated.

Nondiscriminatory incentives for getting the shot and a valid mechanism for learning who got it—those points and more can be deployed in a voluntary vaccine policy.  Here are the key elements:

Education:

Anti-vaccine messaging is all over the internet, but the case for the safety and effectiveness of the COVID-19 vaccines gets better every day.  Employers, especially small- to mid-size employers, can leverage both public and private resources to make the case to their employees.  For example, the CDC has done its job in addressing vaccine safety, vaccine benefits, and perhaps most importantly, vaccine myths and facts.  But one of its best educational contributions to date is this video that directly addresses, in compelling fashion, the most common concerns about how the vaccines were safely developed in such a short time, and whether the new mRNA technology is known to be safe.  Beyond public sources, holding private sessions for employees with local professors or doctors of epidemiology can not only make a compelling case for vaccination, but also debunk in real time the growing list of anti-vaccine myths about COVID-19 vaccination.

Voluntary Policy:

With limited exceptions for certain disabilities and religious observances, under current Equal Employment Opportunity Commission (EEOC) guidance (and subject to state law), it is legally permissible for employers to mandate that employees receive a COVID-19 vaccine as a condition of employment.  A voluntary policy should explain that, and state that the employer has opted not to make vaccination a condition of employment.  Instead, the employer strongly encourages all eligible employees to be vaccinated against COVID-19 on a voluntary basis, subject to the individual advice of the employee’s doctor and the recommendations of the CDC and the FDA.  This explanation that the program could be made mandatory but is not will itself be an incentive for some.

Incentives:

As cited above, there are many types of incentives for vaccination—transportation reimbursement, one-day on-site shot clinics, additional days of vacation or other paid leave (a popular option), extra sick days off specific to the aftereffects of vaccination, monetary payments, merchandise or gift card perks, and entertainment events.  Usually any such incentives come with an eligibility time limit—for example, for all employees fully vaccinated by August 1.  The policy should also address proof of eligibility, such as submission of a copy of the vaccination card, or a print screen of the provider’s online record of the vaccination.  Caveat:  Last week, the EEOC issued updated guidance allowing vaccine incentives—so long as such incentives do not unduly pressure employees to disclose protected medical information.

Legal Compliance: 

For any of these incentives to pass legal muster, they should be made subject to existing employer policies, such as advance notice for use of PTO, and separate maintenance of medical records.  In addition, incentive policies should provide for “exception awards” for those employees with a medical condition and/or disability that conflicts with getting vaccinated; and employees with sincerely held religious beliefs, observances, or practices that conflict with getting vaccinated.  Eligibility rules for such awards must be carefully crafted and allow for the employer to engage in the interactive process to seek out accommodations that will enable the employee to be vaccinated.  In addition, the policy should prohibit disclosure of certain information unnecessary to the eligibility for the program—such as genetic information.

Additional Elements: 

Other considerations for a voluntary vaccine policy include the question of whether it will need to be administered annually, which seems likely enough; how time off for the vaccine and any aftereffects will be scheduled; whether employees will be put on notice that they assume the risks—of vaccination or of coming to work unvaccinated; and nondiscrimination and nonretaliation (especially by co-workers) as to those who choose to vaccinate or not vaccinate.

As COVID-19 continues to abate and, as we watch for mutations in the virus as well as in state and federal law, employers must stay up-to-date with their policy guidance and risk management.

© 2021 Foley & Lardner LLP

ARTICLE BY Kenneth C. Broodo of Foley & Lardner LLP
For more articles on voluntary COVID-19 vaccinations, visit the Coronavirus News section.