Category: Administrative & Regulatory

Happy New Year! – Prepare to Track Time of More Employees or Increase Salaries

The US Department of Labor finally released its highly anticipated changes to the overtime provisions of the Fair Labor Standards Act (FLSA). This rule, which goes into effect on January 1, 2020, will make more employees eligible for overtime because it updates the minimum salary thresholds necessary to exempt certain employees from the FLSA’s minimum wage and overtime pay requirements, as it will:

  • Raise the salary level from the current $455 per week to $684 per week (or $35,568 per year for a full-year worker)
  • Raise the total annual compensation level for highly compensated employees from the current $100,000 per year to $107,432 per year
  • Allow employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the salary level
  • Revise the special salary levels for workers in US territories and in the motion picture industry

This means all employees who are paid a salary falling below the new salary threshold will be non-exempt beginning on January 1, 2020. Said another way, these employees will be eligible for overtime for all hours worked over 40 in a workweek.

Remind Me About the Exemptions Affected

The FLSA generally requires employees to be paid at least minimum wage for every hour worked, and overtime (time and a half) for all hours worked over 40 in a workweek. Certain employees are “exempt” from the FLSA’s minimum wage, overtime, and record-keeping requirements. Key here are the “white collar” exemptions, namely the executive, administrative, and professional exemptions, which depend on three things:

  1. The employee must be paid on a “salaried basis,” meaning the employee receives a fixed, guaranteed minimum amount for any workweek in which the employee performs any work. This means there can be no change in salary regardless of the hours worked.
  2. The employee must be paid a minimum salary of, as of January 1, 2020, $684 per week ($35,658 annually).
  3. However, paying a sufficient salary is not enough — the employee must also perform exempt job duties under one of the exemptions to satisfy this test. (Notably, the new rule did not make any changes to the job duties test, despite ambiguity and years of employer confusion.)

Let’s reiterate this important point again: to be exempt under one of these exemptions, all three prongs above must be satisfied.

I’m Busy — Can I Deal with This Later?

We wouldn’t recommend that. It’s time to start preparing because there are many moving parts when making classification decisions, and, as we all know, 2020 will be here sooner than we think. Also, we suspect these won’t be unilateral decisions made by the human resources department but that others will need to be involved; for most companies, that won’t happen overnight, as it may require significant analysis of the budgetary impact of potential salary increases before employee classifications can be finalized.

So what can you do now? We suggest you start by identifying employees who are currently classified as exempt but whose salaries fall below the new $684 weekly salary. Then, try to estimate the number of hours worked by the employee each workweek, which may be more difficult than it sounds, since exempt workers typically don’t track their time. Depending on the employee’s salary and the number of hours worked, you’ll want to consider whether you’re going to raise the employee’s pay to meet the new threshold or reclassify the employee as non-exempt and pay overtime; and, if you’re going to reclassify the employee, you’ll have to determine how and what the employee will be paid. You should go through the same analysis for those employees who are classified as exempt under the highly compensated employee exemption if their annual salary falls below the new $107,432 threshold.

Think you’re done? Wait, there’s more! Once you identify employees who will be reclassified, you’re going to need to craft your message to explain the changes and new expectations. You may need to develop new policies and/or train the newly non-exempt employees (and possibly their supervisors) on the company’s timekeeping policies as well as on the consequences for failing to follow them. Remember that the FLSA provides strict record-keeping requirements for employers to track the working hours of non-exempt employees. And you may be faced with the need to soothe the egos of employees who feel like being paid hourly is beneath them. (We know this sounds silly, but these morale concerns are real.)

Finally, if you have concerns about the classification of any of your other employees, or if it has simply been awhile since your employee classifications were reviewed, this is a prime time to conduct a general audit of your wage and hour practices. With many employees across the country, and likely within your own organization, being reclassified and becoming eligible for overtime come January 1, you’ll be able to make changes to the classification of other employees who may not meet any exemptions while drawing less attention.

© 2019 Jones Walker LLP

For more on the New DOL Overtime Rule, see the National Law Review Labor & Employment law page.

Global Employment Contracts: The Modern Tower of Babel

Although multi-jurisdictional compliance is a challenge in relation to every aspect of employment law, the structure of employment contracts and the enforcement of global policies require particularly careful consideration.

The need to coordinate individual country compliance across numerous countries whilst still maintaining a common company culture requires extensive knowledge of national laws and considerable flexibility.

Contracts

US-based businesses will be used to working with at-will offer letters, but these are mostly unheard of elsewhere. In most jurisdictions, detailed employment contracts are not only customary, but are required by law. As you would expect, companies must ensure the legal compliance of their contractual documentation for each country in which they do business. This includes engagement letters, employment offers, employment contracts, bonus schemes, stock option plans, etc.

With employment contracts, the most common approach is to prepare a contract compliant with local law in accordance with best practices in the jurisdiction where the individual is to be employed. Contracts should incorporate crucial terms, such as probationary periods, termination grounds, working time provisions, and post-termination non-compete and/or non-solicitation provisions.

  • Countries have varying rules on the maximum duration of a probationary period. For example, France permits an eight-month probationary period, one renewal included, for executives under an indefinite-term contract (contrat à durée indéterminée); whereas a 90-day probationary period is standard in the United States.
  • Subject to applicable statutory restrictions in each country, termination provisions provide a good starting point to enforce the departure of an employee, for example in case of a violation of company policies, such as a code of conduct.
  • In France, where the legal working time is 35 hours per week, there is the option of entering into flat-rate pay agreements for autonomous executives whose roles and responsibilities do not permit alignment with the collective working time/office schedule. In the United Kingdom, there exist more flexible, zero-hours contracts, under which the employer is not obliged to provide any minimum working hours but, equally, the employee has no obligation to accept the work offered.
  • The rules on post-termination provisions, such as confidentiality, non-compete and non-solicitation restrictions, vary significantly. Some jurisdictions follow a reasonableness approach (Australia, the United Arab Emirates, and the United Kingdom); others have outright prohibitions (India, Mexico, and Russia); and others mandate compensation for non-compete clauses (China, France, and Germany).

With so many nuances country-by-country, contract drafters often consider choice of law and jurisdiction clauses. Public policy considerations may, however, override such clauses. For an Italian citizen hired in Italy to work in Italy, it will be difficult to apply Australian law merely because the employer is an Australian corporation. The general rule is that the laws of an employee’s physical worksite will likely apply, regardless of such clauses.

The relevant law for all European Union countries is the Rome I Regulation. Under Rome I, foreign employees in Europe benefit from the mandatory laws of the country with which they have the closest connection, which will usually be the country where they normally work. Accordingly, a German employee working in France should receive a French law-governed employment contract, even if the employee works for a UK employing entity.

For highly mobile employees, however, the place of work is often debatable. For instance, English employment courts have decided that an employee working remotely in Australia has the right to bring an unfair dismissal claim in the United Kingdom if the work is done for a UK employer, regardless of the employee’s physical worksite.

Forum-selection provisions that call for a forum other than the place of employment tend to be unenforceable outside the United States. In London, US expatriates working under contracts with such clauses who sue before an English Employment Tribunal are unlikely to see their claim dismissed when their employer invokes the forum-selection clause.

In choice-of-forum situations, Europeans invoke the provisions of the “Recast Brussels Regulation.” These codify the general rule that employees rarely have to litigate employment disputes outside their host country place of employment, even if a choice-of-foreign-forum clause purports to require otherwise.

Communicating Global Policies

Every organisation has bespoke policies, employee handbooks, and a code of conduct. In addition, every organisation has its own HR practices, such as evaluation processes and training programmes, all dictated by the corporate culture and even corporate vocabulary. It can be challenging to extend those across borders and the legal systems of different countries.

In France, policies related to safety, disciplinary procedures, harassment, whistleblowing, etc., particularly if the policy provides sanctions, must be incorporated within internal rules (règlement intérieur), which must be filed with the employment court and inspectorate. If a company fails to file its policies correctly, it may not be able to discipline employees for violating the rules.

Country by country, companies must consider the interrelationship between the contract and the applicable policies. In some jurisdictions, it is advisable to incorporate relevant handbook policies into the contract. In the United Kingdom, for example, it is compulsory to mention disciplinary and grievances procedures in the contract.

Language Barriers

Where the policies are written is, however, merely the beginning. How they are written is much more complicated. Communicating clearly in multiple languages is now a core HR function for global entities. Many jurisdictions, such as Belgium, France, and Poland, require contracts to be in the local language, even for an employee fluent in the primary language used by the employer. If the contract is not in the local language, its provisions, the policies, and other elements, will be unenforceable, at least for the employer.

A typical example is a global bonus plan, where a failure by the employer to translate the target objectives can allow the employee to claim a bonus without needing to comply with the terms of the plan (i.e., without achieving the stated goals or objectives). This has been confirmed by French case law.

In some countries, such as Turkey, the local language will always prevail, regardless of what is provided for in the contract. In those cases, ensuring translation accuracy can avoid inadvertently granting employees more generous terms under a local translation than the company intended.

Local language translations are also required for other purposes. For instance, in Spain the employment contract needs to be filed with the government, in Spanish. In other countries, such as China, works councils and unions will need to be consulted on the implementation of policies, and submissions for those consultations will need to be in the local language.

As a result, businesses now often consider whether to create employment documents in the local language only, or in two languages. If a document is used that has two columns showing the corporate language and the local language, it is crucial to state which language prevails.

© 2019 McDermott Will & Emery

For more on employment law, see the Labor & Employment law page on the National Law Review.

Vaping Businesses Catch a Bad Rap: The Recent Ban of ALL Vaping Products in Massachusetts Unfairly Prejudices the Vape Industry and Vape Consumers

Massachusetts has taken a drastic and abrupt step by banning the sale of all vaping products, nicotine and THC, within its state borders for the next four months. This drastic and sweeping prohibition against vaping products will have far-reaching economic consequences for many small businesses that make up the bulk of this new and burgeoning industry. The root cause of the recent vaping-related illnesses appears to be the result of illicit and unregulated THC cartridges from the black market.

Reports and Causes

Dr. Michael Siegal, a professor at Boston University’s School of Public Health, recently stated: “Given the fact that close to 90% of the cases and 100% of the deaths for which products have been reported are associated with marijuana vaping, it is inexcusable that the CDC [Centers for Disease Control and Prevention] fails to distinguish between the products being vaped.” The communications from CDC also have failed to distinguish between vaping oil-based e-liquids − which were used in the illicit THC cartridges that have given rise to multiple arrests in Arizona and Wisconsin and cause lipoid pneumonia − and the water/alcohol-based e-liquids that are used in virtually all e-cigarettes. More troubling is the fact that the media largely has overlooked that the manufacturers of nicotine-containing e-liquids filed their ingredient lists with the FDA years ago.

On September 27, 2019, the CDC released the following information:

  • There are 805 lung injury cases reported from 46 states and 1 U.S. territory. Twelve deaths have been confirmed in 10 states.
  • CDC has received sex and age data on 771 patients.
    • About 69% of patients are male.
    • Nearly two thirds (62%) of patients are 18 to 34 years old; with 22% of patients between 18 and 21.
    • Sixteen percent of patients are under 18 years of age.
  • All reported patients have a history of e-cigarette product use or vaping.
  • The latest findings from the investigation into lung injuries associated with e-cigarette use or vaping suggest products containing THC play a role in the outbreak.
    • CDC has received data on substances used in e-cigarettes or vaping products in the 30 days prior to symptom onset among 514 patients:
      • About 77% reported using THC-containing products; 36% reported exclusive use of THC-containing products.
      • About 57% reported using nicotine-containing products; 16% reported exclusive use of nicotine-containing products.

While some policy makers appear to be confused over the cause of the recent reports of lung disease, there is no coincidence that the recent use of vitamin E acetate and possibly other unapproved thickening agents by the illicit THC manufacturers caused the public health crisis that prompted Massachusetts’s ban of all vapor products. One should ask whether it makes sense that vaping nicotine e-liquids, which have been available since at least 2007, would suddenly cause lipoid pneumonia lung disease (which is a rare condition that occurs when fat particles enter the lung) disproportionately in white males with an average age of 19.

Impact of the Ban

The abrupt action of Massachusetts resembles the witch hunts of that former colony’s past. With a single stroke of a pen on an emergency order from Governor Charlie Baker, Massachusetts has foreclosed the right of its citizens to their freedom of choice, denying them the right to an arguably safer alternative to smoking cigarettes, and caused far-reaching economic harm to many small businesses that manufacture and sell vaping products. Such an action will surely cause many bankruptcies, as these legal businesses can no longer afford to pay rent or buy products made and/or sold by other U.S. companies, pay salaries to employees, or pay taxes to Massachusetts and the federal government.

The economic impact of the vaping industry in the United States in 2018 was almost $24 billion, which means that the impromptu actions of Massachusetts will likely cause a reversing trend and cast a negative shadow over a legitimate and safe industry. The broad scope of the ban smacks of an unconstitutional taking of property without due process. Many affected businesses will have difficulty surviving without four months of revenue, which is why national trade organizations such as The Vapor Technology Association and others are considering legal options.

Call for International Forum on Safety and Health Benefits

Unfortunately, as the witch hunts continue, consumers will not be safer. Any person who was vaping legal nicotine containing e-liquids rather than smoking combustible cigarettes will have to make the choice to return to smoking combustible cigarettes or buy a black market e-liquid product. Citizens of Massachusetts who legally use THC through vaping for medicinal purposes also will be affected by the ban. Since all the data shows the lung disease breakouts were overwhelmingly caused by illicit THC cartridges made with vitamin E acetate or other unregulated thickening agents, the public health ban on legitimate products only increases the black market demand and the risk of illicit THC cartridges finding their way back into the hands of consumers, in addition to creating a black market for nicotine e-liquids while the CDC warns consumers not to buy these products off the street

The manufacturers of both nicotine-containing e-liquids and THC-containing products support meaningful regulation so health problems caused by illicit manufacturers can be prevented. A sensible public health strategy devised by the federal government likely could have prevented many of these illnesses and deaths by stopping unregulated illicit-market THC vape products from getting into the hands of consumers. But the voices of science and good public policy are falling on deaf ears while legitimate small businesses are being harmed and consumer choices for legitimate products are being eliminated.

One can only hope that Massachusetts reconsiders this ban and that other states do not follow this type of overreaching prohibition. Public policy regulators should discuss these issues in an international forum such as The E-Cigarette Summit, where the public health benefits experienced by the UK and other countries as well as the detailed facts of the recent cases of lung disease can be debated before businesses are closed. Until then, the black market profits while legal small businesses are “vaporized.”

© 2019 Wilson Elser

For more on vaping regulation, see the National Law Review Products Liability page.

FTC Attorney on Endorsement Guide Compliance

Influencer marketing and review websites have attracted a great deal of attention recently by states and federal regulatory agencies, including the FTC.  The FTC’s Endorsement Guides addresses the application of Section 5 of the FTC Act to the use of endorsements and testimonials in advertising.

At their core, the FTC Endorsement Guides (the “Guides”) reflect the basic truth-in-advertising principle that endorsements must be honest and not misleading.  The Guides suggest several best practices, including, but not limited to the following:

  1. Influencers must be legitimate and bona fide users, and endorsements must reflect honest opinions.
  2. Endorsers cannot make claims about a product that would require proof the advertiser does not have.  Blogger and brands are potentially subject to liability for claims with no reasonable basis therefor.
  3. Clearly and conspicuously disclose material connections between advertisers and endorsers (e.g., a financial or family relationship with a brand)
  4. To make a disclosure “clear and conspicuous,” advertisers should use plain and unambiguous language and make the disclosure stand out.  Consumers should be able to notice the disclosure easily.  They should not have to look for it.  Generally speaking, disclosures should be close to the claims to which they relate; in a font that is easy to read; in a shade that stands out against the background; for video ads, on the screen long enough to be noticed, read, and understood; and for audio disclosures, read at a cadence that is easy for consumers to follow and in words consumers will understand.
  5. Never assume that a social media platform’s disclosure tool is sufficient.  Some platforms’ disclosure tools are insufficient.  Placement is key.
  6. Avoid ambiguous disclosures like #thanks, #collab, #sp, #spon or #ambassador.  Clarity is crucial.  Material connection disclosures must be clear and unmistakable.
  7. Do not rely on a disclosure placed after a CLICK MORE link or in another easy-to-miss location.
  8. Advertisers that use bloggers and other social media influencers to promote products are responsible for implementing reasonable training, monitoring and compliance programs (e.g., educating members about claim substantiation requirements and disclosing material connections, searching for what people are saying and taking remedial action).
  9. Statements like “Results not typical” or “Individual results may vary” are likely to be interpreted to mean that the endorser’s experience reflects what others can also expect.  Therefore, advertisers must have adequate proof to back up the claim that the results shown in the ad are typical, or clearly and conspicuously disclose the generally expected performance in the circumstances shown in the ad.
  10. Brands can ask customers about their experiences and feature their comments in ads.  If they have no reason to expect compensation or any other benefit before they give their comments, consult with an FTC CID and defense attorney to assess whether a disclosure is necessary.  If customers have been provided with a reason to expect a benefit from providing their thoughts about a product, a disclosure is probably necessary.

What about affiliate marketers with links to online retailers on their websites that get compensated for clicks or purchases?  According the FTC, the material relationship to the brand  must be clearly and conspicuously so that readers will be able to decide how much weight to give the endorsement.  In some instances – like when the affiliate link is embedded in a product review – a single disclosure may be adequate.

When the review has a clear and conspicuous disclosure of a material relationship and the reader can see both the review containing that disclosure and the link at the same time, readers may have the information they need.  However, if the product review containing the disclosure and the link are separated, readers may not make the connection.

Never put disclosures in obscure places, behind a poorly labeled hyperlink or in a “terms of service” agreement.  That is not enough.  Neither is placing a disclosure below the review or below the link to the online retailer so readers would have to keep scrolling after they finish reading.

Consumers should be able to notice disclosures easily.

U.S. regulators are not the only ones policing influencer disclosures.  In fact, the Competition and Markets Authority, the British government agency that regulates advertising, recently sent numerous warning letters to British celebrities and other social media influencers.  The CMA has also recently released its guidelines for influencers.

The FTC has already demonstrated that it monitors accounts of popular influencers.  It has also demonstrated that it can and will initiate investigations and enforcement actions.  Brands are well-advised to review promotional practices, implement written policies and monitoring protocols.

© 2019 Hinch Newman LLP

For more on influencers, endorsement & advertising, see the National Law Review Communications, Media & Internet law page.

U.S. Department of Energy Withdraws Expanded General Service Lamp Definition and Refuses to Impose Backstop Efficiency Standard

On September 5, 2019, the U.S. Department of Energy (DOE) published a final rule and proposed rule regarding general service lamps and general service incandescent lamps with far-reaching implications for lamp manufacturers and retailers. DOE is withdrawing the Obama Administration’s revised definitions of general service lamps and general service incandescent lamps, which would have imposed federal efficiency standards on a wide array of lamps. DOE also asserts in the new rule that it has not triggered a statutory “backstop” efficiency standard, which would have prohibited the sale of all non-compliant lamps beginning January 1, 2020. In a separate proposed rule, DOE has initially determined that energy conservation standards for general service incandescent lamps are not justified. DOE’s decisions, which stall what was to be an accelerated transition away from incandescents and toward LEDs, will likely prompt a legal challenge by consumer and environmental groups, as well as a number of states and other interested stakeholders.

Background

As defined by Congress in the Energy Policy and Conservation Act of 1975 (EPCA), general service incandescent lamps (GSILs) are any “standard incandescent or halogen type lamp . . . intended for general service applications,” that “has a medium screw base,” that fits within statutorily defined lumen and operating voltage ranges, and that is not one of twenty-two exempted lamp types. General service lamps (GSLs), in turn, are GSILs or “any other lamps that the Secretary [of Energy] determines are used to satisfy lighting applications traditionally served by general service incandescent lamps.” With the Energy Independence and Security Act of 2007 (EISA), Congress directed DOE to initiate rulemaking procedures to determine whether efficiency standards for GSLs should be amended to be “more stringent” than those that currently apply to fluorescent lamps and incandescent reflector lamps and whether existing exemptions for “certain incandescent lamps should be maintained or discontinued.”

The EISA sought to prod DOE into moving quickly to establish GSL/GSIL efficiency standards. First, Congress provided that if DOE “determines that the standards in effect for general service incandescent lamps should be amended, the Secretary shall publish a final rule not later than” January 1, 2017. Second, Congress included a “backstop” measure: if the Secretary of Energy “fails to complete a rulemaking” as directed, “the Secretary shall prohibit the sale of any general service lamp that does not meet a minimum efficacy standard of 45 lumens per watt,” effective January 1, 2020. The 45-lumen standard is generally understood to be unachievable for many incandescents, and would, therefore, hasten an ongoing transition to LED lamps. The backstop standard is also unusual to the extent that it would apply as a prohibition on sale, while most other appliance and equipment standards enforced by DOE apply to import and manufacture, rather than sale. As a result, the backstop not only impacts lamp manufacturers, but also the retailers who market such lamps.

The Obama Administration in January 2017 promulgated final rules revising the GSL and GSIL definitions to no longer exempt five categories of specialty incandescent lamps (rough service lamps, shatter-resistant lamps, 3-way incandescent lamps, high lumen incandescent lamps, and vibration service lamps), incandescent reflector lamps, or a variety of decorative lamps (T-Shape, B, BA, CA, F, G16-1/2, G25, G30, S, M-14, and candelabra base lamps). Effective January 1, 2020, these lamp categories would be subject to the relevant efficiency standards. The Obama Administration, however, did not initiate rulemaking with regard to the efficiency standards themselves because an appropriations rider prevented it from doing so.

The Trump Administration’s recent move withdraws these revised definitions to maintain the current efficiency regulatory scheme. Without deciding whether or not to amend the efficiency standards themselves, DOE’s new rule prevents those standards from applying to the specialty, decorative, and reflector lamps identified under the earlier rule. Some commenters argue that the new rule violates the EPCA’s “anti-backsliding” provision, while DOE asserts that the provision applies only to efficiency standards and not to the categories to which those standards apply.

Regulatory Uncertainty Regarding “Backstop” Standards

With the new rule, DOE concludes that the backstop will not take effect on January 1 and so will not prohibit the sale of GSLs not meeting the 45 lumens per watt standard. DOE agreed with electrical and lighting trade associations and manufacturers that the backstop would only be triggered if DOE had actually determined to maintain, amend, or eliminate GSL and GSIL efficiency standards but failed to do so, whereas to date, DOE had determined only to maintain the currently effective list of exemptions from the GSL and GSIL definitions. Additionally, DOE states that the backstop is not self-executing but rather requires the Secretary to take action to prohibit the sale of less efficient lamps. DOE asserts that this interpretation of the backstop provision prevents the Secretary of Energy from having to enforce a more stringent efficiency standard that he has not yet determined to be necessary or unnecessary.

A variety of environmental commenters, utility companies, and state attorneys general disagree with DOE’s reading and argue that, without further action, the backstop provision will indeed be triggered on January 1, 2020, because DOE has “fail[ed] to complete” the congressionally directed rulemaking to determine the need for amended efficiency standards. These commenters argue that the backstop is self-executing and requires no further DOE action to go into effect.

Preemption

In recent years, states have begun to enact their own lamp efficiency standards in line with the Obama Administration’s proposal and Congress’ “backstop” standard, in part out of concern that DOE might seek to delay or reverse the federal standard. More states are likely to do so in light of DOE’s latest move, creating the possibility that lamp manufacturers, importers, and retailers will have to navigate a patchwork of state regulations. Such state regulations will likely be subject to litigation, as DOE asserts that even though it has not yet promulgated an efficiency standard, state standards for covered products are preempted.

Next Steps

DOE’s withdrawal of the revised GSL/GSIL definitions or its interpretation of the backstop provision has not yet prompted a legal challenge. Some environmental advocates, however, have raised the possibility of bringing suit to force implementation of the lamp efficiency standards.

 

© 2019 Beveridge & Diamond PC

ARTICLE BY Daniel A. Eisenberg and Jack Zietman of Beveridge & Diamond PC.

EPA Repeals Obama Rule Defining Waters of the U.S.

On Thursday, September 12, EPA General Counsel Matt Leopold announced EPA’s final rule repealing the 2015 Waters of the United States (“WOTUS”) Rule. Significantly, General Counsel Leopold did not announce the final replacement WOTUS Rule, which was proposed in February of this year; the replacement rule remains at the final rule stage as EPA revises the rule in light of public comment. A recent interview with Administrator Wheeler indicates that it will be a few months before the replacement rule is finalized.

The 2015 WOTUS Rule, also called the Clean Water Rule, significantly extended the Clean Water Act’s jurisdiction over streams and wetlands on the basis of significant hydrological or ecological connections to traditional navigable waters, interstate waters, and territorial seas. The 2015 Rule was successfully challenged by a number of states in federal district courts on the grounds that the 2015 Rule departed from both the statutory text of the Clean Water Act and major Supreme Court decisions guiding how “waters of the United States” is to be interpreted. As a result, the 2015 Rule was effective only in 22 states, creating a patchwork of applicability that frustrated government officials and the regulated community alike.

The repeal of the rule will be effective 60 days from the official notice in the Federal Register. When the repeal rule goes into effect, the entire country will be governed by the pre-2015 status quo. The 1986 WOTUS Rule will be the basis for determining which waterbodies are WOTUS until the replacement rule is effective, and the SWANCC and Rapanos guidance documents remain in effect as well.

© 2019 Bracewell LLP

Politics Trumps Economics? Trump’s Revocation of California’s Waiver Under the Clean Air Act

Today President Trump announced on Twitter that the U.S. was revoking California’s waiver under the Clean Air Act (CAA) which allowed it to impose stricter tailpipe emission standards than the federal ones. California’s Governor Newsom and Attorney General Becerra immediately announced that the state would file suit to challenge the revocation.

While the revocation has been characterized as an immediate rollback, the federal corporate average fuel economy (CAFE) standards[1] established under the previous administration, which are consistent with California’s, remain in place. Last year the Trump administration proposed to rollback those standards, freezing the efficiency and emission rules in 2021 and canceling further increases in stringency set through 2028. The final rule has not yet been issued. It is rumored that it will not be, as the administrative record supporting it has many problems and most acknowledge that it faces significant legal hurdles.

A little historical context is helpful. California began regulating tailpipe emissions in the 1960’s under then-Governor Reagan to combat air pollution. When the CAA was signed by President Nixon in 1970 it included a provision, Section 209, that allows California to establish stricter standards by obtaining a waiver of the normal federal preemption rules from U.S. Environmental Protection Agency (EPA). Once granted, other states then can adopt California’s standards. Thirteen states and the District of Columbia have adopted California’s current standards.

For 30 years, under both Republican and Democratic administrations, Section 209 waivers to combat air pollution were routinely granted. In April 2007, the U.S. Supreme Court decided Massachusetts v. EPA, 549 U.S. 497 (2007), ruling that greenhouse gases (GHGs) are pollutants under the CAA. In December 2007, the Bush administration denied California’s request for a waiver to impose tailpipe emission standards aimed at reducing GHGs. California promptly sued in January 2008, joined by 11 other states. That case was pending before the U.S. Supreme Court when President Obama took office. In 2009, the parties settled the case before the Court issued its decision, and in 2010 the U.S. and California reached an agreement that aligned the state and federal standards. Those standards were subsequently expanded and a new waiver was granted in January 2013. It is that waiver that is now being revoked.

While litigation is inherently uncertain, it appears that California has a good case for challenging the revocation. Not only is the revocation unprecedented, there is no provision in the CAA providing for it. Section 209 only establishes the criteria for granting a waiver; it’s silent as to revocation. In 2013, the U.S. determined that the criteria for the waiver had been met, and both the states and the industry have acted in reliance on that determination for more than 6 years. The U.S. has also asserted that the federal Energy Policy and Conservation Act (EPCA) preempts California’s standards. However, in Massachusetts v. EPA, the Supreme Court ruled that EPCA does not displace EPA’s authority to regulate GHGs, and courts subsequently have extended that rationale to hold that EPCA does not preempt states’ regulation of GHGs under the waiver.

Just as it was in the late aughts, the automobile industry has been put in an extremely difficult position by this dispute. California has the 5th largest economy in the world, and when one adds in the 13 other states that have adopted its standards – states like New York and Pennsylvania – that equates to a large segment of the auto market. Having to produce vehicles to meet two different sets of emission standards would be extremely costly. The industry desperately needs regulatory certainty. Reflecting this, in June, 17 automakers sent a letter to President Trump calling for one national standard that included California, and in July, four automakers reached an agreement of sorts with California on emission standards.

Instead of the regulatory certainty that is needed for the economy to operate efficiently, it appears that this dispute will move into a phase of protracted litigation and years of regulatory uncertainty. The dispute may be good politics for those that want to motivate their base on each side, both Republicans in Washington D.C. and Democrats in Sacramento, but it is pretty clearly bad economics.

[1]   CAFE is, essentially, the average fuel efficiency of an automaker’s fleet of vehicles.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

For more on the Clean Air Act, see the National Law Review Environmental, Energy & Resources law page.

CFPB Decision on “GSE Patch” Revives Debate About Prudent Underwriting

The Consumer Financial Protection Bureau (CFPB) recently announced that it will allow the so-called “GSE patch” to expire in January 2021.[1] This patch permits Government-Sponsored Entities Fannie Mae and Freddie Mac to buy loans even though the borrower’s debt-to-income (“DTI”) ratio exceeds the standard limit of 43%.[2]

The CFPB’s decision revives a long-standing debate about what constitutes a creditworthy loan. By eliminating the patch, the DTI ratio of 43% will become an absolute rule, making any loans with higher DTI’s ineligible for GSE funding.[3]

This type of bright-line rule—focused on a single component of a loan—has already drawn criticism as myopic.[4] Some have pointed out that, based on recent studies, DTI alone is a poor predictor for default of prime and near-prime loans.[5] For example, in each year since 2011, the 90-day delinquency rate for loans with DTI ratios over 45% has actually been lower than that for loans with DTI ratios between 30% and 45%.[6]

In fact, some studies indicate that adequate compensating factors can completely offset any minimal increase in risk associated with a higher DTI.[7] Yet, under this new rule, a borrower with a 44% DTI cannot qualify for a GSE loan, notwithstanding any number of other positive factors in the loan file.

It is entirely possible that this new decision could harm consumers, contrary to the CFPB’s mandate to protect them. Barring “high” DTI borrowers from accessing GSE loans could, at best, force such borrowers to obtain more expensive and riskier products, and at worst, preclude such borrowers from qualifying for any product at all.[8] Over the last six years, more than 10% of GSE-backed loans have relied on the patch.[9] Eliminating the patch is also likely to have a disproportionately adverse effect on minorities and others living in underserved communities.[10]

The creditworthiness of a loan, we firmly believe, must be evaluated by considering the loan as a whole. Simply isolating one aspect of the loan file such as DTI does not necessarily provide a thorough understanding of the risk profile. Instead, one typically must consider many characteristics beyond DTI–such as credit score and history, LTV and CLTV, asset and cash reserves, type and length of employment, and many more–to assess whether a loan should qualify for credit.[11]

Simply put, a loan typically cannot be considered a “bad” loan simply because of one feature. Instead, as some lawyers and courts have colorfully put it, each loan is a “snowflake” that must be considered independently and holistically on its own merits.

[1] See, for example.

[2] The other criteria for a Qualifying Mortgage (QM) include: (1) a lack of negative amortization, interest-only, or balloon features; (2) fully-documented income verification; (3) a total of points and fees less than 3 percent of the loan amount; and (4) a fully amortized payment schedule no longer than 30 years, with a fixed rate for at least five years, and all principal, interest, taxes, insurance, and other assessments included. See “Qualified Mortgage Definition for HUD-Insured and Guaranteed Single-Family Mortgages,” 78 Fed. Reg., 75215 (December 11, 2013); “Loan Guaranty: Ability-to-Repay Standards and Qualified Mortgage Definition under the Truth in Lending Act,” 79 Fed. Reg., 26620 (May 9, 2014); “Single-Family Housing Guaranteed Loan Program,” 81 Fed. Reg., 26461 (May 3, 2016).

[3] This rigid model stands in stark contrast to the FHA, VA, and USDA, which have no maximum DTI requirement. See, at page 2.

[4] See, for example.

[5] Id. at page 1; see also, e.g., Richard Green, “The Trouble with DTI as an Underwriting Variable—and as an Overlay,” Richard’s Real Estate and Urban Economics Blog, December 7, 2016.

[6] See(see Table 2).

[7] See page 10 and footnote 33.

[8] Id. at page 7.

[9] Mortgage Rule (see Table 1).

[10] Mortgage GSE Patch.

[11] (see Table 2) (noting that credit scores and LTV ratios might predict default more accurately than DTI ratios).

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP
This article was written by Kenneth Duvall and Philip R. Stein of Bilzin Sumberg.
For more CFPB regulation updates, see the National Law Review Financial Institutions & Banking Law page.

FDA Proposes New Graphic Warnings for Cigarettes

The Federal Cigarette Labeling and Advertising Act (FCLAA), as amended by Section 201 of the Family Smoking Prevention and Tobacco Control Act (TCA; signed into law on June 22, 2009) directs the U.S. Food and Drug Administration (FDA) to develop graphic warnings for cigarette packages and promulgate regulations requiring the warnings within 24 months of enactment of the TCA. Accordingly, FDA issued a final rule requiring graphic warnings on June 22, 2011. However, the original graphic warning images did not survive a First Amendment challenge by the tobacco industry (see R.J. Reynolds Tobacco Co. v. FDA), and FDA withdrew the rule.

In response to a lawsuit filed against FDA by a coalition of public health groups lead by The Campaign for Tobacco-Free Kids, the American Academy of Pediatrics, the American Heart Association and others, the U.S. District Court for the District of Massachusetts ruled that FDA “unlawfully withheld” or “unreasonably delayed” a revised graphic warning rule because nearly a decade had passed since the TCA was enacted. In March 2019, the Court ordered FDA to publish the new proposed rule by August 2019 and issue a final rule in March 2020. FDA promulgated a notice of proposed rulemaking on the new cigarette health warnings on August 15, 2019 (available here).

The proposed rule would require advertising and packages of cigarettes sold in the United States to include one of thirteen warnings:

    • WARNING: Tobacco smoke can harm your children.
    • WARNING: Tobacco smoke causes fatal lung disease in nonsmokers.
    • WARNING: Smoking causes head and neck cancer.
    • WARNING: Smoking causes bladder cancer, which can lead to bloody urine.
    • WARNING: Smoking during pregnancy stunts fetal growth.
    • WARNING: Smoking can cause heart disease and strokes by clogging arteries.
    • WARNING: Smoking causes COPD, a lung disease that can be fatal. (This statement is paired with two different images.)
    • WARNING: Smoking reduces blood flow, which can cause erectile dysfunction.
    • WARNING: Smoking reduces blood flow to the limbs, which can require amputation.
    • WARNING: Smoking causes type 2 diabetes, which raises blood sugar.
    • WARNING: Smoking causes age-related macular degeneration, which can lead to blindness.
    • WARNING: Smoking causes cataracts, which can lead to blindness.

Under the proposal, each statement is paired with a graphic image, except the COPD statement which is paired with two different images. The proposed labels, with the accompanying graphic images, can be found here. Among other requirements, the top fifty percent (50%) of the front and rear panels of the package and 20% of the top of the advertisement would need to provide a graphic warning.

For more information, see FDA’s press release, landing page for Cigarette Health Warnings, and Web Feature.

© 2019 Keller and Heckman LLP

Article by Food and Drug Law at Keller and Heckman LLP.

More on tobacco regulation on the Biotech, Food & Drug law page of the National Law Review.

USCIS Revising, Updating Naturalization Test

USCIS is on its way to revising and updating the Naturalization Test. It will start with a pilot test involving about 1,400 volunteers this fall, then a second field testing pilot in spring 2020.

Last updated in 2008, the new Naturalization Test is expected to be implemented as soon as late-2020.

Recent issues surrounding the Administration’s attempt to add a citizenship question to the 2020 census and delays in processing naturalization applications have prompted the Acting Director of USCIS, Ken Cuccinelli, to tell the Washington Post that paranoia regarding the reason for these changes is not warranted. People who are paranoid will be “sorely disappointed when [the new test] looks like another version of the [current] exam.” Decennial revisions are proposed to “ensure that the civics education requirements remain a meaningful aspect of the naturalization process.”

The working group revising the test includes staff from across USCIS. The group is “soliciting the input of experts in the field of adult education to ensure that this process is fair and transparent.”

Currently, naturalization applicants are asked 10 randomly selected questions from a list of 100 (the list is available on the USCIS website). The questions are on American government, history, and civics and reflect middle school and high school curricula. To pass, 6 of the 10 questions must be answered correctly. There is a 90% pass rate among applicants. A 2018 survey by the Woodrow Wilson National Fellowship Foundation showed the pass rate among U.S. citizens was only 36%. Citizens over the age of 65 had the highest pass rate: 74%.

Test yourself. Answer the following (answers are at the bottom of this post)

  1. Why did the colonists fight the British?

  2. When was the Declaration of Independence adopted?

  3. How many amendments does the Constitution have?

Along with changes to the civics test, the agency also is considering changes to the English language proficiency test. According to the naturalization statute, applicants must read and write “simple words and phrases” and “no extraordinary or unreasonable condition shall be imposed upon the applicant.”

When Francis Cissna, then-Director of USCIS, announced the revision he noted that the new tests would continue to provide “special consideration” to those over 65 who have lived in the U.S. as green card holders for at least 20 years. He also stated that “due consideration” would be given to “applicants’ education, background, age, length of residence in the United States, opportunities available and efforts made to acquire the requisite knowledge, and any other elements or factors relevant to an appraisal of the adequacy of the applicant’s knowledge and understanding.”

Last year, 750,000 applicants were naturalized. In the years preceding presidential elections, the application levels typically increase.

****

The answers:

  1. Because of high taxes (taxation without representation), because the British army stayed in their houses (i.e., boarding and quartering), or because they did not have self-government
  2. July 4, 1776
  3. 27
Jackson Lewis P.C. © 2019
This article is written by Peter A. Reca of Jackson Lewis P.C.
For more immigration news, see the National Law Review Immigration type of law page.