Category: Administrative & Regulatory

Amendments to SEC Rules Regarding Broker Dealer Financial Responsibility and Reporting Requirements

Katten Muchin

The Securities and Exchange Commission adopted amendments to the financial responsibility requirements for broker dealers under the Securities Exchange Act of 1934 (Exchange Act) designed to safeguard customer securities and funds held by broker dealers. Such requirements include Exchange Act Rule 15c3-1 (Net Capital Rule), Rule 15c3-3 (Customer Protection Rule), Rules 17a-3 and 17a-4 (together, Books and Records Rules) and Rule 17a-11 (Notification Rule, and together with the Net Capital Rule, the Customer Protection Rule and the Books and Records Rules, the Financial Responsibility Rules).

The SEC amended the Customer Protection Rule to: (1) require “carrying broker dealers” that maintain customer securities and funds to maintain new segregated reserve accounts for account holders that are broker dealers; (2) place certain restrictions on cash bank deposits for purposes of the requirement to maintain a reserve to protect customer cash, by excluding cash deposits held at affiliated banks and limiting cash held at non-affiliated banks to an amount no greater than 15 percent of the bank’s equity capital, as reported by the bank in its most recent call report; and (3) establish customer disclosure, notice and affirmative consent requirements (for new accounts) for programs where customer cash in a securities account is “swept” to a money market or bank deposit product.

The SEC amended the Net Capital Rule to: (1) require a broker dealer when calculating net capital to include any liabilities that are assumed by a third party if the broker dealer cannot demonstrate that the third party has the resources to pay the liabilities; (2) require a broker dealer to treat as a liability any capital that is contributed under an agreement giving the investor the option to withdraw it; (3) require a broker dealer to treat as a liability any capital contribution that is withdrawn within a year of its contribution unless the broker dealer receives permission for the withdrawal in writing from its designated examining authority; (4) require a broker dealer to deduct from net capital (with regard to fidelity bonding requirements prescribed by a broker dealer’s self-regulatory organization (SRO)) the excess of any deductible amount over the amount permitted by the SRO’s rules; and (5) clarify that any broker dealer that becomes “insolvent” is required to cease conducting a securities business.

The SEC amended the Books and Records Rules to require large broker dealers (i.e., at least $1,000,000 in aggregate credits or $20,000,000 in capital) to document their market, credit and liquidity risk management controls. Under the amended Notification Rule there are new notification requirements for when a broker dealer’s repurchase and securities lending activities exceed 2,500 percent of tentative net capital (or, alternatively, a broker dealer may report monthly its stock loan and repurchase activity to its designated examining authority, in a form acceptable to such authority). In addition, the amended Notification Rule requires insolvent broker dealers to provide notice to regulatory authorities.

In a separate release, the SEC also amended Exchange Act Rule 17a-5 (Reporting Rule). Under the amended Reporting Rule, a broker dealer that has custody of the customers’ assets must file a “compliance report” with the SEC to verify that it is adhering to broker dealer capital requirements, protecting customer assets it holds and periodically sending account statements to customers. The broker dealer also must engage a Public Company Accounting Oversight Board (PCAOB)-registered independent public accountant to prepare a report based on an examination of certain statements in the broker dealer’s compliance report. A broker dealer that does not have custody of its customers’ assets must file an “exemption report” with the SEC citing its exemption from requirements applicable to carrying broker dealers. The broker dealer also must engage a PCAOB-registered independent public accountant to prepare a report based on a review of certain statements in the broker dealer’s exemption report. A broker dealer that is a member of the Securities Investor Protection Corporation (SIPC) also must file its annual reports with SIPC.

The rule amendments also require a broker dealer to file a new quarterly report, called Form Custody, that contains information about whether and how it maintains custody of its customers’ securities and cash. The SEC intends that examiners will use Form Custody as a starting point to focus their custody examinations. In addition, a broker dealer, regardless of whether it has custody of its clients’ assets, must agree to allow SEC or SRO staff to review the work papers of the independent public accountant if it is requested in writing for purposes of an examination of the broker dealer and must allow the accountant to discuss its findings with the examiners.

The effective date for the amendments to the Financial Responsibility Rules is 60 days after publication in the Federal Register. The effective date for the requirement to file Form Custody and the requirement to file annual reports with SIPC is Dec. 31, 2013. The effective date for the requirements relating to broker dealer annual reports is June 1, 2014.

Click here to read SEC Release No. 34-70072 (Financial Responsibility Rules for Broker Dealers).

Click here to read SEC Release No. 34-70073 (Broker Dealer Reports).

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Resale Price Maintenance in China: Enforcement Authorities Imposing Large Fines for Anti-Monopoly Law Violations

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Recently Shanghai High People’s Court reached a decision in the first lawsuit involving resale price maintenance (RPM) since China’s Anti-Monopoly Law (AML) came into effect five years ago.  Shortly thereafter, a key enforcement agency announced RPM-related fines against six milk powder companies, five of which are non-Chinese.  Both cases clearly show that RPM can be a violation of the AML, and that RPM is currently under much greater scrutiny by enforcement authorities.  It would be prudent for all foreign corporations active in China’s consumer markets to take heed of these changes in China and conduct an immediate review of any potential RPM violations.

On 1 August 2013 the Shanghai High People’s Court reached a decision in the first anti-monopoly lawsuit involving resale price maintenance (RPM) since China’s Anti-Monopoly Law (AML) came into effect in August 2008.  In addition to this judicial decision, on 7 August 2013 one of the key agencies in charge of enforcing the AML, the National Development and Reform Commission (NDRC), announced RPM-related fines of USD 109 million against six milk powder companies, five of which are non-Chinese.  Both the High People’s Court and the NDRC have been striving to clarify how they will treat RPM, and specifically have focused on the issue of whether RPM should be treated as a per se violation or should be evaluated according to a “rule of reason” analysis.

Judicial Decisions in Civil Lawsuits

According to the recent decision by the Shanghai High People’s Court, in order to hold that an RPM provision is a monopoly agreement, the court must find that the RPM provision has restricted or eliminated competition.  Furthermore, the burden of proof will be on the plaintiff to show a restriction or elimination of competition arising out of the RPM.  The High People’s Court explicitly stated that this burden is the opposite from the burden of proof for horizontal monopolies, such as a cartel, in which case the burden of proof falls on the defendant to show that the agreement does not have any effect of eliminating or restricting competition.  This burden for horizontal monopolies has been further examined and confirmed by the “Judicial Interpretation of Anti-Monopoly Disputes” that was issued by China’s Supreme People’s Court on 1 June 2012.

Administrative Decisions in Enforcement Actions—Liquor and Infant Milk Formula

There have been several key RPM enforcement actions in 2013.  In February, the NDRC imposed a fine of USD 80 million on the famous Chinese liquor brands Maotai and Wuliangye for requiring distributors to resell the products above a certain price, which is common in some sectors in China.  On 2 July, according to the Price Supervision and Anti-Monopoly Bureau of the NDRC, six milk powder companies came under investigation for RPM violations of the AML.  According to the NDRC’s statements on the case, “from the evidence obtained, the milk powder companies under investigation instituted price controls over distributors and retailers, which excluded and limited market competition and therefore are alleged to have violated the Anti-Monopoly Law”.  The NDRC later announced record fines in that case of USD 109 million, which were the equivalent of between 3 per cent and 6 per cent of the companies’ revenue in 2012.

According to media reports, in the Maotai and Wuliangye cases, the NDRC provided clear indications about some of the factors that it will consider when determining whether the RPM has “eliminated or restricted competition”.   Specifically, when assessing the relevant market and market power of the two companies, the NDRC analysed the market structure and the role played by the two companies in the liquor industry, as well as the degree to which the products are substitutable with similar products and the loyalty of consumers towards the two liquors.  Based on this analysis, the NDRC concluded that the RPM provisions in the agreements with distributors of the two liquor giants eliminated and restricted competition, and thus were vertical “monopoly agreements”.

According to recent media reports, the NDRC has indicated it will “severely crack down” on and sanction vertical monopoly agreements such as RPM if they are maintained by business operators dominant in the market.  If business operators are not dominant, the NDRC reportedly indicated that it would still investigate all vertical monopoly conduct and determine if there has been any elimination or restriction of competition.

Conclusions

These civil lawsuits and administrative cases clearly show that RPM can be a violation of the AML and that RPM is currently under much greater scrutiny by enforcement authorities.  If RPM is an issue in civil lawsuits, a plaintiff will have to prove that RPM eliminates or restricts competition.  However, there are some indications that this burden of proof may be easily met.  In administrative cases, the NDRC will have to be satisfied that it has sufficient proof to show there is an elimination or restriction of competition.  However, it is unclear what level of evidence would be required to show such a restriction and it may not be a very high level, especially if the accused business operator is dominant in the market.

RPM has been a common feature of distribution agreements and other contracts in many sectors in China.  However, the recent cases clearly show there is a serious compliance risk if RPM continues to be part of a corporation’s normal practices.  This is particularly true for business operators that have a dominant market position or a group of business operators that are regarded as jointly dominant under the AML (in China, in certain circumstances, dominance is presumed with a market share as low as 10 per cent).  Unless the RPM conduct clearly falls within an exception in Article 15 of the AML, a company using RPM may face serious fines and confiscation of illegal gains.  It would be prudent for all foreign corporations active in China’s consumer markets to take heed of these changes to the enforcement priorities of the competition/antitrust authorities in China and conduct an immediate review of any potential RPM violations.

Alex An and Jared Nelson also contributed to this article.

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Zappos and It's Effect On "Browswrap" Agreements

Lewis & Roca

Key Takeaways For An Enforceable Terms of Use Agreement

In light of the recent Nevada federal district court decision In re Zappos.com, Inc., ‎Customer Data Security Breach Litigation, companies should review and update their ‎implementation of browsewrap agreements to ensure users are bound to its terms. MDL No. ‎‎2357, 2012 WL 4466660 (D.Nev. Sept. 27, 2012).

A browsewrap agreement refers to the online Terms of Use agreement that binds a web ‎user merely by his continued browsing of the site, even when he is not aware of it. Any ‎somewhat experienced web user is no stranger to the Terms of Use link that leads to the ‎browsewrap agreement. Yet, the users tend to ignore the link’s existence, and rarely think of it ‎as a “contract” with any practical effects. In Zappos, the court questioned the browsewrap ‎agreement’s validity particularly because of this tendency among web users. The court ruled the ‎arbitration clause in Zappos’ browsewrap Terms of Use was unenforceable because the users did ‎not agree to it and Zappos had the right to modify the terms at any time. ‎

Background of the Case

Founded in 1999, Zappos.com is a subsidiary of Amazon.com and one of the nation’s ‎biggest online retailers for footwear and apparel. Currently headquartered in Henderson, ‎Nevada, the company has more than 24 million customer accounts. In mid-January 2012, its ‎computer system experienced a security breach in which hackers attempted to access the ‎company’s customer accounts and personal information.

After Zappos notified its customers about the incident, customers from across the country ‎filed lawsuits against Zappos, seeking relief for damages arising from the breach. The cases were ‎transferred to and consolidated in Nevada. Zappos then sought to enforce the arbitration clause ‎contained in its Terms of Use, which would stay the litigation in federal court and compel the ‎case for arbitration. The court denied Zappos’ motion on two grounds: there was no valid ‎agreement to arbitrate due to the lack of assent by the plaintiffs and the contract was ‎unenforceable because it reserved to Zappos the right to modify the terms at any time and ‎without notice to its users.

Lessons Learned from the Browsewrap

Mutual Assent Must Be Clear 

Arbitration provisions are a matter of contract law, and the traditional elements of a ‎contract must be met even though Zappos’ Terms of Use was presented in electronic, ‎browsewrap form on the website. An essential element of contract formation is mutual assent by ‎the parties to the contract, which the court found was missing in this case as there was no ‎evidence of the plaintiffs’ assent.

The court compared the browsewrap agreement with another popular form of online terms ‎of use agreement, the “clickwrap” agreement. Clickwrap agreements require users to take ‎affirmative actions, such as clicking on an “I Accept” button, to expressly manifest their assent to ‎the terms and conditions.‎

Since Zappos’ browsewrap agreement did not require its users to take similar affirmative ‎action to show their assent to the terms and conditions, there was no direct evidence showing ‎that the plaintiffs consented to or even had actual knowledge of the agreement, including the ‎arbitration clause.‎

Link It Front and Center 

Furthermore, the court found Zappos’ Terms of Use hyperlink was inconspicuous and ‎thus did not provide reasonable notice to its users. The link was a) “buried” in the middle or ‎bottom of each page and became visible when a user scrolls down, b) appeared “in the same size, ‎font, and color as most other non-significant links,” and c) the website did not “direct a user to ‎the Terms of Use when creating an account, logging in to an existing account, or making a ‎purchase.” The court concluded that under ordinary circumstances, users would have no reason ‎to click on the link.‎

Unilateral Right to Modify or Terminate Won’t Work

Another problem with Zappos’ browsewrap agreement was that it was illusory and thus ‎unenforceable. In the agreement, the company “retain[ed] the unilateral, unrestricted right to ‎terminate the arbitration agreement” and had “no obligation to receive consent from, or even ‎notify, the other parties to the contract.” Users would unsuspectingly agree to the changes by ‎continuing to use the site. Under this provision, Zappos could seek to enforce the arbitration ‎clause, as it did here, or not enforce it by modifying the clause without notice to its users when it ‎was no longer in its interest to arbitrate. In either circumstance, the users would still be bound to ‎the agreement.

Implications for Companies

As a result of this decision, companies should carefully reassess the display and content ‎of the online terms of use they adopt to ensure their enforceability. In a narrow sense, the ‎decision means an arbitration clause in a browsewrap agreement similar to Zappos’ may be ‎deemed unenforceable. More broadly, this decision threatens the validity and enforceability of ‎other terms and conditions contained in a browsewrap agreement, which may deprive the ‎company of the agreement’s protection and favorable terms. ‎

Clickwrap agreements seem to provide the solution to Zappos’ problem. The court ‎suggested a clickwrap agreement could obtain a user’s assent to the terms and conditions. A ‎company may implement the clickwrap agreement through account registration or purchase ‎check-out, tailored to the nature of the company’s business and user interaction. The system may ‎require a user to click “I Accept” to secure the user’s assent to be bound by the agreement before ‎he can proceed further on the website. ‎

On the other hand, the court did not conclude that browsewrap agreements are never ‎enforceable. Other courts have held that browsewrap agreements are generally enforceable. ‎Enforceability largely depends on how the company presents the link and terms to the users such ‎that the users would have reasonable notice of the information. Accordingly, a browsewrap ‎agreement may be enforceable if the hyperlink is conspicuously located and displayed. ‎

In addition, companies should communicate and secure a user’s assent to any ‎modification when the user has previously accepted the terms and conditions. The user may ‎consent through another clickwrap agreement showing the modified terms. With a browsewrap ‎agreement, notice of the changes should, at the minimum, be conspicuously displayed on the ‎webpage. ‎

What This Means 

The Zappos decision reflects a change in the public policy on web activities, and users ‎who do not affirmatively agree to the online Terms of Use may no longer be bound. Consumers ‎are increasingly turning to the web for goods and services. In reaction, courts are beginning to ‎look closer into the transactions and resulting issues that occur online. In this process, courts are ‎testing and requiring new standards for these Terms of Use agreements. Companies should be ‎aware of the court’s evolving attitude towards the different types of agreements. You are ‎encouraged to seek legal guidance to properly adapt your implementation of Terms of Use ‎agreements. Failure to update your Terms of Use agreements may leave you exposed to ‎unfavorable terms that the Terms of Use is designed to prevent.‎

Will Obesity Claims Be the Next Wave of Americans with Disabilities Act (ADA) Litigation?

Poyner SpruillIn a new federal lawsuit in the U.S. District Court for the Eastern District of Missouri, Whittaker v. America’s Car-Mart, Inc., the plaintiff is alleging his former employer violated the Americans with Disabilities Act (ADA) when it fired him for being obese.  Plaintiff Joseph Whittaker claims the company, a car dealership chain, fired him from his job as a general manager last November after seven years of employment even though he was able to perform all essential functions of his job, with or without accommodations.  He alleges “severe obesity … is a physical impairment within the meaning of the ADA,” and that the company regarded him as being substantially limited in the major life activity of walking.

The EEOC has also alleged morbid obesity is a disability protected under the ADA.  In a 2011 lawsuit filed on behalf of Ronald Katz, II against BAE Systems Tactical Vehicle Systems, LP (BAE Systems), the EEOC alleged the company regarded Mr. Katz as disabled because of his size and terminated Katz because he weighed over 600 lbs.  The suit alleged Mr. Katz was able to perform the essential functions of his job and had received good performance reviews.  The case was settled after BAE Systems agreed to pay $55,000 to Mr. Katz, provide him six months of outplacement services, and train its managers and human resources professionals on the ADA.  In a press release announcing the settlement, the EEOC said, “the law protects morbidly obese employees and applicants from being subjected to discrimination because of their obesity.”

Similarly, in 2010, the EEOC sued Resources for Human Development, Inc. (RHD) in the U.S. District Court for the Eastern District of Louisiana, for firing an employee because of her obesity in violation of the ADA. According to the suit, RHD fired Harrison in September of 2007 because of her severe obesity.  The EEOC alleged that, as a result of her obesity, RHD perceived Harrison as being substantially limited in a number of major life activities, including walking.  Ms. Harrison died of complications related to her morbid obesity before the case could proceed.

RHD moved for summary judgment, arguing obesity is not an impairment.  The court, having reviewed the EEOC’s Interpretive Guidance on obesity, ruled severe obesity (body weight more than 100% over normal) is an impairment.  The court held that if a plaintiff is severely obese, there is no requirement that the obesity be caused by some underlying physiological impairment to qualify as a disability under the ADA.  The parties settled the case before trial for $125,000, which was paid to Ms. Harrison’s estate.

In June 2013, the American Medical Association (AMA) declared that obesity is a disease.  Although the AMA’s decision does not, by itself, create any new legal claims for obese employees or applicants under the ADA, potential plaintiffs are likely to cite the new definition in support of ADA claims they bring.  In light of these recent developments, obesity related ADA claims will likely become more common.

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Centers for Medicare and Medicaid Services (CMS) Issues Revised Process for Making National Coverage Determinations

vonBriesen

Yesterday, the U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services (CMS) published its revised process for external requests and internal reviews for new national coverage determinations (NCDs) or for reconsideration of existing NCDs.  Today’s guidance supersedes CMS’s previous process issued in 2003.

Prior to formally requesting an NCD or reconsideration, CMS encourages requesters to contact CMS staff in the Coverage and Analysis Group (CAG).  The CAG staff may identify additional needed information and supporting documentation.  The requester may also find that a formal request is not needed.  For example, CAG staff could determine that coverage of the item or service is already available or that the item or service falls outside the scope of an NCD.

If the requester decides to move forward with requesting an NCD review, the requester must provide the following, which would constitute a “complete, formal request”:

  1. A final letter of request that is clearly identified as “A Formal Request for A National Coverage Determination.”
  2. A full and complete description of the item or service in the request.
  3. The scientific evidence supporting the clinical indications for the item or service, including the proposed use of the item or service, the target Medicare population, the medical indication(s) for which the item or service can be used, and whether the item or service is used by health care providers or beneficiaries.
  4. The Medicare Part A or B benefit category or categories in which the item or service falls.
  5. Additional information if the item or service is currently under FDA review.

Once CMS receives the complete formal request, it will add the request to its tracking sheet on the CMS website and permits public comments on the request.  CMS will also initiate a formal evidence review and will generally issue a proposed decision within six months of opening the NCD review.  CMS will accept public comments for 30 days after issuing the proposed decision.  CMS will then issue a final NCD within 60 days of the end of the public comment period.  These timeframes could be extended, however, if CMS commissions a third party technology assessment, convenes the Medicare Evidence Development and Coverage Advisory Committee, or requests a clinical trial.

Today’s guidance also provides the process for requesting reconsideration of an NCD.  The reconsideration must be in writing and clearly identified.  The requester must also provide documentation meeting one of the following:

  1. Additional scientific evidence not considered at the most recent review and a “sound premise” that the evidence may change the NCD decision.
  2. Arguments that CMS’s conclusion materially misinterpreted the existing evidence at the time the NCD was decided.

CMS will generally accept or reject an external NCD reconsideration request within 60 days of receiving the request.

In certain circumstances, CMS may internally initiate review of an NCD.  CMS will also periodically review NCDs that have not been reviewed in the past 10 years.  CMS will publish a list of NCDs proposed for removal and rationale for removal and provide a 30 day public comment period.  CMS anticipates that this process will reduce the timeframe for removal or amendment of an NCD.  Currently, removal or amendment takes 9 to 12 months.

For more information, please see the guidance at this link.

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Imperfect Fit: Abercrombie Store Threatens Location In Tailored-Clothing Mecca Savile Row

Womble Carlyle

We’ve all heard the various means of describing the inappropriate place for an otherwise benign thing, rendering the otherwise benign thing a hazard or a liability or just plain offensive.  In 1855, the author Robert De Valcourt referred to, “An awkward man in society is like a bull in a china shop, always doing mischief.”  Robert De Valcourt, The Illustrated Manners Book: A Manual of Good Behavior and Polite Accomplishments (1855).  In 1926, Justice Sutherland opined, “A nuisance may be merely a right thing in the wrong place — like a pig in the parlor instead of the barnyard.”  Village of Euclid v. Ambler Realty Co., 272 U.S. 365 (1926).

Village of Euclid, of course, upheld the constitutionality of the zoning concept, a replacement of single purposes ordinances and private litigation for land use management.  See David Owens, Land Use Law In North Carolina (2d ed. 2011).

bull china shop retail real estate land use

“Late Ming dynasty, kaolin and pottery stone foundation, cobalt firing enamelling with Arabic lettering.  If only I could find a well-tailored suit and some skinny jeans to go with this vase.” 

Well, the “pig” or the “bull” in one particular instance is anticipated to be an Abercrombie and Fitch children’s store in the heart of London.

The “china shop” or the “parlor”?  Well, that may be Savile Row, legendary collection of fine British tailors and suitmaker to the rich and famous.  Consider this quote from Mark Henderson, chairman of “heritage tailor Gieves & Hawkes”, reported by CNBC about objection to the Abercrombie store:

“Opening a kids store on Savile Row is a somewhat bizarre thing to do. It’s a fairly narrow street, it’s got its own atmosphere to it.  It’s just fundamentally a mistake from Abercrombie – they don’t get everything right.”

We don’t purport to know the land use laws in London, we’ll leave that to the Ealing Common Land Use Barrister blog, but it’s always interesting to see just how common and universal land use issues can be.

It’s also interesting to see how different motives underpin all land use issues.  For example, one might assume the “hubub” over the Abercrombie store is a degradation of the historical nature of the narrow street, as Mr. Henderson alludes.  Well, maybe the distaste is different for another, even another from a seemingly similar perspective.  Consider this worry about “higher rents”, from John Hitchcock of “bespoke tailor Anderson & Sheppard” (man, I love the British):

“One or two of the tailors are concerned it might put the rents up, and it will do, I suppose.  There’s only so much rent we can pay. Our costs are already high as we make every suit by hand – unlike the big chains which don’t make their products on the premises.”

The Lesson of the Day

Land use decisions are nuanced legally but they are also very nuanced politically.  In this one space, one street within one small universe of British tailors, we have two very distinct motives for refusing the Abercrombie store.  Yes, both are opposed to the store, but each is opposed for a different reason, which means a political salve must address, at least, two distinct concerns.

One must fully and fairly understand the forces against which one is working, before success is at hand.  I think Sun Tzu, the Zhou Dynasty Land Use Litigator, said that.

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Mexico: U.S. Natural Gas Savior?

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Much has been made of the exponential growth in natural gas supply within the continental United States due to the horizontal drilling and fracking techniques employed in recent years. The resulting natural gas glut has reversed the conventional wisdom that America would be a net importer of natural gas for most of the 21st century with the expectation now being that America, despite being by far the world’s largest consumer of hydrocarbons, will be a significant exporter of natural gas overseas in the coming years and decades. This development has resulted in a flurry of proposed liquefied natural gas (“LNG”) terminals that hope to export natural gas in order to take advantage of the large spreads between prices in America and those in Europe and Asia. Those price spreads exist because a worldwide market for natural gas doesn’t exist, as opposed to oil where the relatively short-lived Brent-WTI price differential has evaporated in recent months.

However, these export terminals cannot export gas to foreign countries lacking a free trade agreement with the U.S. without permits from the U.S. Department of Energy and the Federal Energy Regulatory Commission (“FERC”). The queue for approval is long with only three facilities (including most recently the Lake Charles LNG Project in Lake Charles, Louisiana) receiving approval from the Department of Energy and only one of those (the Sabine Pass project in Cameron Parish, Louisiana) receiving approval from FERC. Given the long construction lead times for these projects and political pressure from environmentalists and buyers of natural gas who want prices to remain low, it won’t be until 2016 when any significant volumes of LNG are exported from the continental United States. Rival producers such as Qatar, Australia and Indonesia are rapidly signing contracts with Japan, Korea and China to satisfy the long-term needs of those countries as America continues to delay the development of its LNG infrastructure.

Meanwhile, the historically low natural gas prices created by the production glut are forcing energy companies to find a profitable market for their natural gas in the short to medium term. They appear to have found one in America’s backyard: Mexico. Constructing pipelines to straddle the U.S.-Mexico border entail less regulatory complexities and attract less political attention than LNG exports. With the existing U.S.-Mexico natural gas pipelines almost at capacity, energy companies cannot build border pipelines fast enough, with several new pipeline projects coming online, including Kinder Morgan’s El Paso Natural Gas Co. export pipeline near El Paso, Texas, with a capacity of 0.37 billion cubic feet per day. According to the U.S. Energy Information Administration all of the in-progress pipeline projects on the U.S.-Mexico border could result in a doubling of American natural gas exports to Mexico by the end of 2014.

This new export market should continue to support U.S. shale development in the near-term and medium-term future, especially in Texas, despite low natural gas prices and continued supply growth. Longer term prospects for U.S. natural gas exports to Mexico are also bright as well. Even though Mexico has large hydrocarbon reserves itself, the 1938 nationalization of its oil industry and the subsequent decades of underinvestment have seen Mexican hydrocarbon production steadily decline in the last decade. The Mexican constitution effectively prohibits private investment in hydrocarbon production and the Mexican public firmly believes in public ownership of hydrocarbons. There is widespread agreement among many Mexican politicians that private capital, especially from U.S. energy companies with the expertise to tap offshore and shale hydrocarbons, is needed to reverse the production decline, but whether public opposition can be overcome remains in doubt. Mexican President Enrique Peña Nieto is pushing constitutional reforms to attract foreign capital, but even if those pass Mexico is years away from converting any private capital into increased production. If those reforms do not pass, Mexico will be forced to continue to look to U.S. natural gas producers to provide it with its growing energy needs.

So while a regulatory bottleneck is endangering America’s ability to be a long-term overseas exporter of natural gas, Mexico, with its growing economy and inability to tap its own reserves, seems poised to play an outsized role in a continued expansion of American natural gas production. LNG exports might be the wave of the future, but natural gas exports to Mexico are the here and now.

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Health Care Reform Update – Week of August 5th, 2013

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Leading the News

Office of Personnel Management Addresses Premiums for Congressional Staffers On August 1st, the U.S. Office of Personnel Management (OPM) announced it will release proposed regulations within the next week to allow the federal government to contribute to the health care premiums of members of Congress and their staffs. Earlier in the week, President Obama said he was working with Congress to address the issue, which had prompted concerns about a brain drain from Capitol Hill. Senator Tom Coburn (R-OK) said he intended to place a hold on Katherine Archuleta, the nominee to be the chief at OPM, until the issue was resolved.

House Energy and Commerce Committee Unanimously Approves SGR Bill On July 31st, by a unanimous 51-0 vote, the House Energy and Commerce passed legislation that would repeal the sustainable growth rate (SGR) Medicare physician payment method and shift payment to quality-based measures.

Implementation of the Affordable Care Act

On July 29th, CMS issued a release that indicates the ACA and its gradual closure of the donut hole coverage gap has saved 6.6 million Americans over $7 million, an average savings of $1,061 per beneficiary.

On July 29th, the White House issued a blog post noting nationwide health care costs grew just 1.1% from May 2012 – May 2013. The 1.1% growth is the slowest in 50 years.

On July 30th, House Republicans released a playbook for the August recess that encourages members to hold “emergency town halls” in response to ACA implementation.August 5, 2013

On July 30th, the CMS released an application that allows organizations to become “Champions for Coverage” under the ACA.

On July 30th, CMS released an application for community health centers and other health providers that want to become certified application counselor organizations and help people searching for insurance coverage on the ACA exchanges.

On July 30th, the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JTC) issued an estimate that the employer mandate delay of the ACA will cost about $12 billion.

On July 31st, HHS issued a request for information from stakeholders regarding section 1557 of the ACA, which prohibits discrimination based on race, color, national origin, sex, age, or disability in health care programs.

On July 31st, the Kaiser Family Foundation (KFF) released a report and interactive map on how insurance coverage would be expanded as a result of the ACA.

On July 31st, House Speaker John Boehner (R-OH) said he is still unsure if House Republicans will use the threat of a government shutdown in an effort to defund the ACA.

On July 30th, EHealthInsurance reached a deal to sell its products on the ACA insurance exchanges. EHealth CEO Gary Lauer says his company’s involvement on the exchanges will lead to increased enrollment and improved competition in the insurance marketplace.

On August 1st, California announced six insurers that will offer coverage on the state’s Small Business Health Options Program (SHOP). A summary of the Covered California plan indicates the premium prices and coverage options for hypothetical business operations.

On August 1st, 38 Republican Senators sent a letter to White House Counsel Kathryn Ruemmler with a request for information on the government agencies involved in ACA implementation.

On August 1st, the House Ways and Means Committee held a hearing on the role of the IRS in ACA implementation. Gary Cohen of the CMS Center for Consumer Information and Insurance Oversight (CCIIO) and Daniel Werfel of the IRS testified before the committee.

On August 1st, the House Energy and Commerce Committee conducted a hearing with CMS Administrator Marilyn Tavenner to discuss the current state of ACA implementation.

On August 2nd, the House voted, 232-185, to prohibit the IRS from being involved in enforcement of the ACA. The vote was the 40th time the House has attempted to repeal components of the ACA.

Other HHS and Federal Regulatory InitiativesAugust 5, 2013

On July 30th, the Department of Justice (DOJ) announced Wyeth Pharmaceuticals agreed to pay over $490 million to resolve criminal and liability issues arising from the company’s unlawful marketing of Rapamune, a drug only approved by the Food and Drug Administration (FDA) for kidney transplants.

On July 31st, CMS issued final payment rules to increase payments to skilled nursing facilities by 1.3%, at a cost of $470 million, and increase payments to inpatient rehabilitation facilities by 2.3%, a $170 million cost.

On August 1st, the FDA released 2014 user fee rates for biosimilars, brand name prescription drugs, generic prescription drugs, and medical devices.

On August 2nd, the FDA issued a rule addressing ‘gluten-free’ food labeling. The rule states foods that claim to be gluten-free but contain more than 20 parts per million of gluten will be considered misbranded products.

On August 2nd, CMS released a final rule relating to payments for acute care and long-term care hospitals in 2014. The rule increases payment to the nation’s 3,400 acute care hospitals by $1.2billion. Payment to 440 long-term care facilities is set to increase $72 million.

Other Congressional and State Initiatives

On July 31st, Rep. Daniel Lipinski (D-IL) introduced legislation to require hospitals to publicly disclose the prices charged for the most common medical procedures.

On August 1st, Democratic Senators sent a letter to President Obama urging the White House to establish set targets for Medicare and Medicaid cost savings.

On August 1st, Senators Mark Warner (D-VA) and Johnny Isakson (R-GA) introduced The Care Planning Act of 2013, a bill to improve palliative care and provide seriously ill patients with greater control of their own care.

On August 2nd, Michigan and Illinois announced a partnership to share Medicaid information systems, a plan expected to save millions of dollars for both states.

On August 2nd, Senators Mike Crapo (R-ID), Ben Cardin (D-MD), and Angus King (I-ME) introduced a bill, S. 1422, to require the CBO to more completely address the cost-savings of preventive healthcare.

Other Health Care News

On July 29th, doctors from the National Cancer Institute published a report suggesting the word ‘cancer’ is overused. The report argues the overuse of the term leads to unnecessary and potentially harmful treatment in many patients.August 5, 2013

On July 29th, Gallup released a poll indicating Americans have exercised less each month in 2013 than during the same months in 2012. About half of Americans say they exercise at least 30 minutes three or more days each week.

On August 2nd, the Institute of Medicine released a report on the efforts needed to tackle obesity in the United States.

Hearings and Mark-Ups Scheduled

The Senate and the House of Representatives are in recess until the week of September 9th.

David Shirbroun also contributed to this article.

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Prospects for Comprehensive Immigration Reform: The House of Representatives Kicks the Can Down the August Recess Road

GT Law

The U.S. House of Representatives left town last week for the long August recess without passing one immigration-related bill. House Republicans made it quite clear that the Senate- passed S. 744, The Border Security, Economic Opportunity, and Immigration Modernization Act, would never be taken up by the House.

To date, the House has five immigration bills reported out of either the Judiciary or Homeland Security Committee. The Comprehensive Immigration Reform bill that the House Gang of 8 (now 7) has been working on for the past 18-plus months has not be introduced and the common wisdom is that it will not be the vehicle that will be used in the House.

None of the five bills have been brought to the floor for a vote. When the House returns in September, there is a feeling that the bills might be brought up in the following order:

  1. The Border Security Results Act (H.R. 1417) was introduced on April 9, 2013 by House Homeland Security Chairman Michael McCaul and approved by the House Homeland Security Committee on May 20, 2013 by voice vote. H.R. 1417 requires results verified by metrics to end The Department of Homeland Security’s ad hoc border approach and to help secure our nation’s porous borders.
  2. The Strengthen and Fortify Enforcement Act (H.R. 2278), also know as The SAFE Act, was approved by the House Judiciary Committee on June 18, 2013. The SAFE Act seeks to improve the interior enforcement of our immigration laws by preventing the Executive Branch from unilaterally halting federal enforcement efforts. To this end, the bill grants states and localities the authority to enforce federal immigration laws.
  3. The Legal Workforce Act (H.R. 1772) was introduced on April 26, 2013 by Rep. Lamar Smith and approved by the House Judiciary Committee on June 26, 2013. This bill discourages illegal immigration by ensuring that jobs are made available only to those who are authorized to work in the U.S. Specifically, the bill requires employers to check the work eligibility of all future hires though the E-verify system.
  4. The Supplying Knowledge Based Immigrants and Lifting Levels or STEM Visas Act (H.R. 2131), also known as The SKILLS Visa Act, was introduced by Rep. Darrell Issa on May 23, 2013. The SKILLS Visa Act changes the legal immigration system for higher-skilled immigration and improves programs that make the U.S. economy more competitive. The SKILLS Visa Act was approved by the House Judiciary Committee on June 27, 2013.
  5. On April 26, 2013, House Judiciary Committee Chairman Bob Goodlatte introduced the Agricultural Guestworker Act (H.R. 1773), also known as The AG Act. The Committee approved this bill on June 19, 2013 in a voice vote (20-16). This bill attempts to provide farmers with a new guest worker program to ease access to a lawful, agricultural workforce that employers may call upon when sufficient American labor cannot be found.

The members of the Republican leadership in the House have not been clear about the timing strategy for a potential conference with the Senate. It is not very likely, however, that a conference will occur until the end of 2013, if at all.

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Picture This: The National Labor Relations Board’s Division of Advice Wants to Sue Employer for Issuing Social Media Policy with Photo/Video Ban

Michael Best Logohe National Labor Relations Board’s Division of Advice (the Division) recently recommended that the Board issue a complaint against Giant Foods for implementing its social media policy without first bargaining with two unions, and for maintaining a social media policy that included unlawful provisions. Although the Division analyzed several social media policy provisions, its criticism of two provisions in particular—a ban on using photo and video of company premises, and restrictions on employees’ use of company logos and trademarks—makes it very difficult for employers to protect their brands while at the same time complying with federal labor laws.

Giant Foods’ social media policy forbade employees from using company logos, trademarks, or graphics without prior approval from the company. The policy also prohibited employees from using photographs or video of the “Company’s premises, processes, operations, or products” without prior approval as well.

The Division concluded that these provisions were unlawful under the National Labor Relations Act (NLRA) and that the National Labor Relations Board (the Board) should issue a complaint against Giant Foods for implementing them. As employers are becoming keenly aware, the NLRA safeguards employees’ right to engage in protected concerted activity. Such activity includes group discussions and some comments by individual employees that relate to their wages, hours, and other terms conditions of employment.

The Division concluded that banning employees from using company logos or trademarks was unlawful because: (1) employees should be allowed to use logos and trademarks in online communications, including electronic leaflets or pictures of picket signs with the employer’s logo; and (2) those labor-related interests did not raise the concerns that intellectual property laws were passed to protect, such as a business’ interest in guarding its trademarks from being used by competitors selling inferior products.

Additionally the Division concluded that restricting employees from using photo and video of company premises unlawfully prevented them from sharing information about participation in protected concerted activities, such as snapping a picture of a picket line.

Unfortunately, the Board’s expansive view will likely hamper companies’ ability to prevent damage to their brand and reputation.  Not allowing employers to ban the taking of videos and photos on their premises, or restricting the use of company logos/trademarks could lead to public relations nightmares such as the one Subway Foods recently endured after it was revealed that an employee posted a graphic picture on Instagram of his genitalia on a sub, with the tag line “I will be your sandwich artist today.”

Given the prevalence of cell phones with photo and video capabilities, and the ease of uploading photos and videos to the internet, a company that cannot control its employees’ use of those devices on their premises will be one bad employee decision away from public embarrassment.

What else can be gleaned from the Giant Foods Advice Memorandum? That the Board’s General Counsel will continue to prod employers to eliminate blanket bans on certain kinds of employee conduct from their social media policies and replace those bans with provisions that include specific examples of what employee conduct the policy prohibits. The Board and its General Counsel have previously found social media policies that restricted employee use of confidential information and complaints about an employer’s labor practices as unlawful; Giant Foods makes clear that the agency is also scrutinizing other kinds of policy provisions that potentially could infringe on an employee’s right to engage in protected concerted activities.

Accordingly, employers should review their policies with counsel so that they can tailor them to restrict employee conduct that will damage the company and its brand, but not be “reasonably” read to restrict employees’ rights to engage in protected concerted activities.