Category: Antitrust & Trade Regulation

Kroger/Albertsons Ruling Provides Lessons for Merger Remedy Divestitures

On December 10, a federal court in Oregon issued a preliminary injunction against Kroger’s proposed $24.6 billion acquisition of Albertsons, which would have been the largest supermarket merger in US history (Albertsons terminated the merger agreement after the ruling).1 The Federal Trade Commission, the District of Columbia, and eight States filed the suit in February 2024, alleging that the transaction would substantially lessen competition in violation of Section 7 of the Clayton Act. The opinion by Judge Adrienne Nelson tackled a number of interesting antitrust issues, including the government’s allegation that the merger would reduce competition not only for grocery store sales but also for union grocery store labor. However, one of the most instructive aspects of the opinion is the court’s rejection of the defendants’ proposed divestiture package.

We have outlined the scope of the competitive problem that the divestiture needed to mitigate, the parameters of the proposed divestiture, and the deficiencies the court found. Companies assuming that divestitures will eliminate regulatory concerns about the anticompetitive impact of a transaction should examine whether there is a divestiture package that is commercially acceptable and that can account for the concerns Judge Nelson highlighted. The antitrust agencies and courts will almost certainly use this latest judicial decision as guidance when evaluating such proposals.

Competitive Problem

The government’s economic expert offered what the court found to be a persuasive market concentration analysis showing the merger would be presumptively anticompetitive in 1,574 local geographic markets for “supermarkets” and 1,785 local geographic markets for “large format stores” (i.e., traditional supermarkets and supercenters, natural and gourmet food stores, club stores, and limited assortment stores). The court also found evidence (ordinary course documents and witness testimony) of substantial head-to-head competition between the merging firms bolstered the government’s case. Finally, the court credited the government’s expert’s analysis showing that the loss of head-to-head competition would lead to price increases at numerous stores. The government thus put forth a multiprong prima facie showing that the merger would lessen competition substantially. On rebuttal, the defendants first sought to establish that competitive entry and merger efficiencies would mitigate the merger’s anticompetitive effects, but the court was not convinced. The defendants then attempted to show that their proposed divestiture remedy would solve the competitive concerns.

Divestiture Proposal

Defendants entered into an agreement — contingent on the merger closing — to divest 96 Kroger stores and 483 Albertsons stores to a third party. The proposed third-party divestiture buyer is primarily a wholesaler but has acquired retail chains in the past and currently operates approximately 25 stores. The divestiture package also included ownership of four store banners, a license to use two other banners in certain states, ownership of five private label brands, a temporary license to use two other brands, six distribution centers, and one dairy manufacturing plant. A transition services agreement provided the divestiture buyer the right to use certain of the defendants’ services, technology, and data for periods ranging from six months to four years.

Deficiencies

The court explained numerous ways in which the Kroger-Albertsons divestiture package was inadequate to sufficiently mitigate the anticompetitive effects of the merger and overcome the government’s showing of a substantial lessening of competition:

  • Many markets unaddressed – The court noted that 113 of the presumptively unlawful markets did not contain even a single store to be divested, meaning the divestiture would have done nothing to change the merger’s anticompetitive effects in those markets. (The high number of unaddressed markets was in part a function of the fact that the defendants’ economic expert utilized a market definition method and applied market concentration presumption thresholds that differed from those the government advanced and the court adopted.)
  • Many markets insufficiently addressed – Other markets contained divestiture stores, but those divestitures were insufficient to take away a presumption of harm. Crediting the government’s economic expert, the court noted that even if all the proposed divestitures were perfectly successful, the merger would still have been presumptively unlawful in 1,002 local supermarket markets and 551 large format store markets based on market concentration levels.
  • Risk of unsuccessful divestitures – The court also agreed with the government’s analysis showing that if divested stores were to lose sales or close, the number of presumptively problematic markets would rise significantly. For example, if the divested supermarkets were to lose 10 percent of their sales, the number of presumptively unlawful markets would increase from 1,002 to 1,035. If they lose 30 percent of their sales, the number would increase to 1,276.
  • Mixed and matched assets – The divestiture package did not represent an existing, standalone, fully functioning company but rather a mix of stores, banners, private labels, and other assets. This meant the buyer would have had to rebanner 286 of the 579 divested stores (and for some of these stores, the buyer would not be acquiring any banner currently used in the state). The court cited testimony from the government’s expert in retail operations and consumer shopping behavior, as well as other witnesses, explaining that rebannering is complicated and risky. The divestiture buyer also would have eventually lost access to many Kroger and Albertsons private label brands that customers are familiar with and would need to replace those with new private label products. The court noted witness testimony emphasizing the importance of private label brand equity and recounting the time required to launch a new private label brand.
  • Divestiture size – The court expressed concern that with only 604 total stores (25 existing stores plus the 579 divested stores), the divestiture buyer may not have replaced the competitive intensity lost from Kroger and Albertsons, each of which had thousands of stores.
  • Divestiture buyer’s experience – The court was concerned that the divestiture buyer had no experience running a large portfolio of retail grocery stores. The 579 divestiture stores included hundreds of pharmacies and fuel centers, whereas the buyer’s current 25 stores include only one pharmacy and no fuel centers. The court also noted that the buyer’s experience offering private label products was much more limited than what the divestiture stores demand and that the buyer currently lacks any retail media capabilities, which would have taken three years to set up.
  • Divestiture buyer’s track record – The buyer has made divestiture purchases in the past, which the court noted have not been successful. Specifically, the buyer acquired 334 retail grocery stores between 2001 and 2012, but only three remained under its operation by the end of 2012 (the rest were closed or sold off). The court also cited evidence that the buyer’s current stores are performing below expectations.
  • Transfer of employees – Approximately 1,000 Albertsons employees agreed to transfer to the divestiture buyer, including Albertsons’ current Chief Operating Officer, who had experience with prior divestiture integrations. The court found, however, that these transfers would not have fully mitigated the buyer’s inexperience and lack of success in grocery retail and could not overcome difficulties inherent in the selection of assets and structure of the transition services agreement in the divestiture package.
  • Divestiture buyer’s independence – The court viewed the transition services agreement as broad in services and time. It noted that the buyer would remain interdependent with the merged firm for many years. The court expressed particular concern over the fact that Kroger would have provided sales forecasting data and a base pricing plan to the buyer, which the buyer could have adjusted only by communicating with Kroger’s “clean room.”
1 Federal Trade Commission v. Kroger Co. & Albertsons Cos., Inc., 2024 WL 5053016, No. 3:24-cv-00347 (D. Or. Dec. 10, 2024).
©2024 Katten Muchin Rosenman LLP
For more on the FTC, visit the NLR Antitrust Trade Regulation section

FTC Closely Monitoring Healthcare Lead Generators As Open Enrollment Begins

The Federal Trade Commission is watching the healthcare lead generation industry closely.

On December 10, 2024, the Federal Trade Commission announced that it has sent warning letters to 21 companies that market or generate leads for healthcare plans. The letters were sent as open enrollment season for healthcare plans is ongoing. They provide guidance and provide about deceptive or unfair claims that likely violate laws enforced by the FTC.

The letters were sent to companies that provide marketing or advertising, including lead generation, related to Affordable Care Act Marketplace health insurance and healthcare-related products, such as limited benefit plans and medical discount programs.

“It is critical for consumers’ health and financial well-being that marketers of health plans be honest about the plans they and their partners are offering,” said FTC lawyer Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “The FTC has been watching this important sector closely, especially during open enrollment season, and these warning letters put companies on notice that unlawfully marketing or advertising health plans to consumers can result in serious legal consequences.”

Based on information collected by FTC staff and the agency’s enforcement experience in this area, the types of claims FTC staff has warned about include those that may:

  • misrepresent the benefits included in a healthcare plan, including any insurance benefits;
  • misrepresent that a healthcare plan is major or comprehensive medical health insurance or the equivalent of such health insurance;
  • misrepresent the costs of healthcare plan; and
  • falsely claim that consumers who enroll in a healthcare plan will receive free offers, cash rewards, rebates, or other incentives.

Consult with a season FTC defense lawyer if you are a lead generator or marketer of health insurance leads in order to minimize risk of government scrutiny.

The letters provide examples of prior relevant FTC actions against marketers and lead generators that operate in this field, including Simple Health, Benefytt Technologies, Partners in Healthcare Association, and Consumer Health Benefits Association.

While the letters do not allege any wrongdoing by any of the recipients, they encourage the companies to conduct a thorough review of their advertisements to ensure they are complying with applicable laws and rules, and the letters note that the FTC is closely monitoring this marketplace for unlawful conduct that is harming consumers.

© 2024 Hinch Newman LLP
For more on the FTC, visit the NLR Antitrust Trade Regulation section

Revisions to HSR Form Released

On October 7, 2024, the Federal Trade Commission (FTC), with the concurrence of the U.S. Department of Justice (DOJ), released its long-awaited final rule related to the revision of the Hart-Scott-Rodino (HSR) premerger notification form (the “Final Rule”).

The Final Rule will be effective 90 days after its publication in the Federal Register. The FTC and DOJ state that the revisions are intended to close the perceived gaps in current information provided in the HSR process, such as the disclosure of entities and individuals within the acquiring person; identification of potential labor market effects; identification of acquisitions that create a risk of foreclosure; identification of actions that may involve innovation effects, future market entry, or nascent competitive threats; and disclosure of roll-up or serial acquisition strategies.

The Final Rule dictates the use of two separate forms: one for the acquiring entity and one for the entity to be acquired. Each party will have to designate a “deal team lead” whose files must be searched for 4(c) and 4(d) documents, even if the deal team lead is not an officer or director. In addition, the acquiring entity must provide details not previously requested, including an organization chart, a list of officers and directors, a description of the ownership structure of the entity, and information on the transaction rationale.

While the information requested in the Final Rule is more limited than what was included in the original proposed rule, there are substantial changes that parties should expect to add significant time and cost to the filing process.

©2024 Epstein Becker & Green, P.C. All rights reserved.
For more on Hart-Scott-Rodino, visit the NLR Antitrust Trade Regulation section.

FTC Social Media Staff Report Suggests Enforcement Direction and Expectations

The FTC’s staff report summarizes how it views the operations of social media and video streaming companies. Of particular interest is the insight it gives into potential enforcement focus in the coming months, and into 2025. Of particular concern for the FTC in the report, issued last month, were the following:

  1. The high volume of information collected from users, including in ways they may not expect;
  2. Companies relying on advertising revenue that was based on use of that information;
  3. Use of AI over which the FTC felt users did not have control; and
  4. A gap in protection of teens (who are not subject to COPPA).

As part of its report, the FTC recommended changes in how social media companies collect and use personal information. Those recommendations stretched over five pages of the report and fell into four categories. Namely:

  1. Minimizing what information is collected to that which is needed to provide the company’s services. This recommendation also folded in concepts of data deletion and limits on information sharing.
  2. Putting guardrails around targeted digital advertising. Especially, the FTC indicated, if the targeting is based on use of sensitive personal information.
  3. Providing users with information about how automated decisions are being made. This would include not just transparency, the FTC indicated, but also having “more stringent testing and monitoring standards.”
  4. Using COPPA as a baseline in interactions with not only children under 13, but also as a model for interacting with teens.

The FTC also signaled in the report its support of federal privacy legislation that would (a) limit “surveillance” of users and (b) give consumers the type of rights that we are seeing passed at a state level.

Putting it into Practice: While this report was directed at social media companies, the FTC recommendations can be helpful for all entities. They signal the types of safeguards and restrictions that the agency is beginning to expect when companies are using large amounts of personal data, especially that of children and/or within automated decision-making tools like AI.

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Copyright © 2024, Sheppard Mullin Richter & Hampton LLP.
For more on Social Media, visit the NLR Communications Media Internet section.

FTC Finalizes Major Rewrite of HSR Filing Requirements

Last week, the Federal Trade Commission (FTC) voted unanimously to issue a final rule that implements significant changes to the Hart-Scott-Rodino (HSR) premerger notification form and accompanying instructions. While the final rule includes numerous modifications from the draft proposal that was announced in June 2023 (see our previous client alert), this still represents the most substantial change to the HSR filing requirements in decades, and will require parties to HSR-reportable transactions to gather and provide considerably more information and documents than under the current rules. The final rule will take effect 90 days after publication in the Federal Register (unless there is a successful court challenge in the interim).

Under the HSR Act, parties to certain mergers and acquisitions are required to submit premerger notification forms that disclose information about their proposed deal and business operations. The FTC and the Antitrust Division of the US Department of Justice (DOJ) use this information to conduct a competitive impact assessment within the statutory HSR waiting period, which is typically 30 calendar days. According to the FTC’s press release accompanying the final rule, the new requirements are a necessary response “to changes in corporate structure and deal-making, as well as market realities in the ways businesses compete, that have created or exposed information gaps that prevent the agencies from conducting a thorough antitrust assessment of transactions subject to mandatory premerger review.”

Key Changes to HSR Filing Requirements

Some of the main changes will require the following:

  • A description of each party’s strategic rationales for the transaction, with cross-references to documents submitted with the HSR filings that support the stated rationales.
  • A new Overlap Narrative section that will require the buyer and target to identify and provide (i) a written description of current or planned products or services where they compete (or could compete) with each other, (ii) actual or projected revenues for each such product or service, (iii) a description of all categories of customers that purchase or use the product or service, and (iv) the top 10 customers for each customer category (e.g., retailer, distributor, broker, national account, local account, etc.).
  • A narrative describing supply relationships between the transaction parties or between the buyer and any other business that competes with the target, including the amount of revenue involved and the top 10 customers or suppliers.
  • In addition to requiring documents discussing the competitive aspects of the proposed transactions that were prepared by or for officers and directors (current Item 4(c)), filing persons must also submit (i) transaction-related documents prepared by or for a “supervisory deal team lead”, and (ii) ordinary course business plans and reports about overlapping products and services that were provided to the CEO or Board of Directors within a year prior to filing.
  • Acquiring persons must list all current and recent officers and directors (or in the case of unincorporated entities, individuals exercising similar functions) in cases where those individuals hold similar positions in entities that have overlapping operations with the target.
  • Identification of minority holders of additional entities related to the transaction parties, as well as more information about minority interest holders, including limited partners in partnerships where the limited partner has certain rights related to the board (or similar bodies) of the acquiring entity and its related parties, and in some cases, the target. (Currently, the HSR form only requires disclosure of the general partner.)
  • Additional information regarding certain prior acquisitions by both the buyer and the target. (Currently, only buyers must provide information regarding prior acquisitions.)
  • If an HSR filing is being made based on an executed letter of intent or term sheet rather than a definitive agreement, the filing must include a dated document containing sufficient details about the transaction.
  • Parties must submit the entirety of all agreements related to the transaction (not just the principal transaction agreement).
  • All foreign-language documents must be accompanied by English-language translations.
  • Filing parties must disclose economic subsidies received from certain foreign governments or entities of concern to the United States.
  • Information related to certain contracts with defense or intelligence agencies. 

    It is worth noting that a few particularly onerous or controversial proposals from the initial draft rule were not adopted, including the proposal to require collection and production of all drafts of responsive documents (rather than just final versions), as well as specific information about labor markets and each filing party’s workers.

    Related Changes to the Merger Review Process

    Significantly, the FTC announced that, following the final rule coming into full effect, it will lift its suspension on early termination of the waiting period for HSR filings involving transactions that clearly raise no competitive issues. According to the FTC, “[b]ecause the final rule will provide the agencies with additional information necessary to conduct antitrust assessments, the rule will help inform the processes and procedures used to grant early terminations.”

    The FTC also stated that it is introducing a new online portal for market participants, stakeholders, and the general public to directly submit comments on proposed transactions that may be under review by the FTC (it is unclear if the DOJ will follow suit). According to its press release, the FTC “welcomes information on specific transactions and how they may affect competition from consumers, workers, suppliers, rivals, business partners, advocacy organizations, professional and trade associations, local, state, and federal elected officials, academics, and others.”

    Practical Implications for Deals

    The final rule issued by the FTC marks a sea change in the preparation of filings for HSR-reportable transactions. The new requirements will significantly increase the time, effort and cost of preparing all HSR filings, with the impact likely to be magnified for deals where the buyer and target are competitors or operate within the same supply chain. Transaction parties will need to account for this new reality in their deal timelines and budgets. Transaction agreements will need to allow for more time to file HSR, and it may be advantageous for some parties to begin filing preparations much earlier in the deal process. In addition, the new transaction agreement requirements mean that key terms of deals will need to be more fully fleshed out before parties can file HSR and start the 30-day clock.

    Also, since filing parties will now have an affirmative obligation to disclose competitive overlaps as well as supplier-customer relationships, careful consideration will need to be given to how those are described, since statements made in the HSR filing could later be used against the parties in an in-depth investigation (if the reviewing agency issues a “Second Request”) or in litigation (if the agency challenges the deal). Moreover, for serial acquirors, descriptions of products and overlaps in one filing could have consequences for future HSR-reportable transactions.

    Additionally, the new obligation on filers to provide customer and/or supplier information in the HSR filing may cause parties to re-evaluate their approach towards third party outreach regarding proposed transactions, given the possibility of earlier and more frequent FTC/DOJ calls to those customers and suppliers.

    © 2024 Bracewell LLP
    For more on HSR, visit the NLR Antitrust Trade Regulation section.

FTC Finalizes “Click-to-Cancel” Rule

The Federal Trade Commission (FTC) has finalized amendments to the Negative Option Rule, now retitled the “Rule Concerning Recurring Subscriptions and Other Negative Option Programs“ (“Rule”), which represents a significant overhaul of the regulatory framework governing how companies handle subscription services and automatic renewals.

Over the years, the FTC has received numerous complaints about deceptive practices related to negative option programs, prompting the need for updated regulations. The original rule, established in 1973, was focused primarily on protecting consumers from deceptive practices in physical goods such as book and record clubs. However, with the rise of e-commerce, the need for more robust protections for online subscriptions has grown significantly. The FTC’s amendments aim to address these issues and bring more transparency and fairness to this business model.

“Negative option marketing” is a broad term that encompasses a variety of subscription and membership practices. The Rule expands coverage to apply broadly to all forms of negative option marketing in any form of media, including, but not limited to, electronic media, telephone, print, and in-person transactions. It defines the negative option feature as “a contract provision under which the consumer’s silence or failure to take affirmative action to reject a good or service or to cancel the agreement is interpreted by the negative option seller as acceptance or continuing acceptance of the offer.” Negative option programs generally fall into four categories: prenotification plans, continuity plans, automatic renewals, and free trial (i.e., free-to-pay or nominal-fee-to-pay) conversion offers.

Most provisions of the Rule will go into effect 60 days after its publication in the Federal Register, except the provisions regarding disclosure of important information (§ 425.4), consent (§ 425.5) and simple cancellation (§ 425.6), which will become effective 180 days after publication in the Federal Register, thus providing businesses with a period to adapt their subscription practices to these new requirements.

Key Updates

  • Clear and Conspicuous Disclosures: The FTC now requires businesses to present subscription terms in a clear and conspicuous manner before any billing occurs. Sellers must provide the following “important information” prior to obtaining the consumer’s billing information: (1) that consumers’ payments will increase or recur, if applicable, unless the consumer takes steps to prevent or stop such charges; (2) the deadline by which consumers must act to stop charges; (3) the amount or ranges of costs consumers may incur, and frequency of the charges; (4) information about the mechanism consumers may use to cancel the recurring payments. Each of the required disclosures must be clear and conspicuous, and failure to provide this information is a deceptive or unfair practice.
  • Consent: The Rule requires negative option sellers to obtain consumers’ express informed consent before charging the consumer. The failure to obtain such consent is a deceptive or unfair practice. Sellers must keep or maintain verification of the consumer’s consent for at least three years.
  • Click-to-Cancel Requirement: One of the most notable changes in the Rule is the introduction of the “click-to-cancel” provision. This new requirement mandates that companies provide a straightforward and user-friendly method for consumers to cancel their subscriptions. At a minimum, the simple mechanism for cancellation must be provided through the same medium the consumer used to consent to the Negative Option Feature. For example, for services that are subscribed to online, the cancellation process must also be available online and must be as easy as signing up for the service in the first place. This is especially significant because many businesses have been criticized for making cancellation intentionally difficult, such as by requiring consumers to call a customer service line or navigate multiple steps just to cancel their service.
  • Removal of Annual Reminder Requirement: During the rulemaking process, the FTC had initially proposed requiring businesses to send consumers an annual reminder of their ongoing subscription services and provide information on how to cancel. However, this provision was ultimately removed from the final Rule. While consumer advocates had supported the inclusion of annual reminders, which would have provided an extra layer of protection for consumer, businesses argued that this requirement would be overly burdensome, especially for companies with large subscriber bases. However, the Rule still mandates that sellers must provide consumers with clear and timely notifications regarding recurring charges.
  • Removal of Prohibition on Upsell Offers: Another key provision of the proposed version of the Rule was the regulation of upsell offers during the cancellation process, which would have required sellers to immediately effectuate cancellation unless they obtained the consumer’s unambiguously affirmative consent to receive a save prior to cancellation. Companies often attempt to retain customers by offering lower-priced alternatives or special deals when a consumer tries to cancel a subscription. While these offers are not inherently problematic, the FTC has expressed concern that some businesses use upsell tactics to confuse consumers or prevent them from successfully canceling their service. However, the finalized version did not adopt this amendment. The FTC has determined that revisions to this proposed provision are necessary, for which it would need to seek additional comment. This means that while businesses are free to present alternatives to consumers, they also must provide a clear and direct path to cancelation without requiring consumers to navigate multiple steps or reject numerous offers.
  • Enforcement and Penalties: To ensure compliance with the new Rule, the FTC has increased the potential penalties for violations. Businesses that fail to adhere to the new requirements can face significant fines. The FTC has the authority to pursue penalties of up to $51,744 per violation, which could quickly add up for companies with large subscriber bases. This enforcement mechanism underscores the seriousness of the FTC’s efforts to crack down on deceptive subscription practices and provides a strong incentive for businesses to comply with the Rule.
  • Relation to Other Laws: The Rule does not preempt state laws that require more protection for consumers. Rather, it reflects the FTC’s intention to align with other laws and regulations, such as the Restore Online Shoppers’ Confidence Act (ROSCA), The Telemarketing Sales Rule, and state-level automatic renewal laws.

Industry Impact

The new regulatory landscape for Negative Option Programs will have several notable impacts on industries that rely heavily on subscription-based revenue models, such as e-commerce, streaming platforms, Software as a Service providers, health and fitness subscriptions, and other online services. Companies will need to reassess their subscription practices, ensure that their cancellation processes are in line with the new requirements, and update their disclosures to meet the transparency standards set by the FTC. Businesses will also need to invest in employee trainings and possibly make changes to their subscription systems and software. This could lead to increased compliance and operational costs as companies try to come into compliance with these new requirements, on top of the potential for lost revenue due to less automatic renewal income.

© 2024 Foley & Lardner LLP
For more on the FTC, visit the NLR Antitrust Trade Regulation section

Administration Action Could Unravel the De Minimis Exception for Goods From China

Many e-commerce retailers are closely monitoring increasing bipartisan criticism of the Section 321 de minimis program. This program, which provides an exemption for goods valued at $800 or less destined to a single person on a given day, allows these goods to enter the US duty and tax-free without formal entry.

While this expedited clearance process has been beneficial for many retailers, critics argue that it creates loopholes that can be exploited, particularly by foreign sellers, to bypass tariffs and import restrictions. Addressing US Congress’ inability to pass de minimis reform legislation, on September 13, the Biden-Harris Administration took decisive action to address these concerns. They announced a notice of proposed rulemaking aimed at reducing de minimis import volumes and strengthening trade enforcement through the following measures:

  • Limiting De Minimis Exemptions for Products Subject to Other Trade Remedies: Removal of the de minimis exemption for shipments that contain products subject to additional tariffs under Sections 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962 (e.g., from China).
  • Increased Disclosure Requirements for De Minimis Shipments: Additional information would be required for de minimis shipments, including the 10-digit tariff classification and identification of the person claiming the exemption.
  • Compliance Requirements for the CPSC: All importers of consumer products must file Certificates of Compliance (CoC) with the US Consumer Product Safety Commission (CPSC).

It is unclear when the proposed rule will be published.

The Administration also calls on Congress to implement legislation to further reform the de minimis program. Earlier this year, the House Ways and Means Committee introduced H.R. 7979 – End China’s De Minimis Abuse Act, which would similarly limit the use of this program for products subject to Sections 201, 301, and 232 and require a 10-digit Harmonized Tariff Schedule of the United States declaration. There have been several other de minimis reform bills proposed however, Congress has struggled to pass comprehensive legislation to reform the program. This announcement may be the push Congress needs to pass legislation during the lame duck session, but we will see…

Although these measures are primarily aimed at restricting Chinese e-commerce giants like Shein and Temu, these government actions could have long-term implications for direct-to-consumer sales. Any changes to the program will impact other US retailers that benefit from Section 321, small start-up companies, as well as consumers who might experience longer wait times and higher costs for their online orders due to these changes.

What’s the Problem?

Over the past decade, the rise of online shopping has led to a sevenfold increase in the number of shipments that enter the United States through the de minimis exemption. The US Department of Homeland Security (DHS) has reported that nearly 4 million de minimis shipments enter the United States per day. This volume makes it impossible for the government to properly screen the shipments for import violations. The government is concerned because contraband, including drugs, counterfeit goods, goods violating the Uyghur Forced Labor Prevention Act (UFLPA), and undervalued shipments are allegedly entering the United States through this program. DHS reported that as of July 30, 89% of cargo seizures in fiscal year 2024 originated as de minimis shipments. We have previously reported on proposed legislation and government actions aimed at addressing the alleged misuse of this program to import contraband or improperly declare shipments, particularly those originating from China.

A Focus on China

Most of these shipments are sold on e-commerce platforms and originate in China. As a result, many of these shipments would normally be subject to additional duties under the Section 232, 301, or 201 programs. According to the Administration’s announcement, Section 301 tariffs apply to 40% of US imports, including 70% of textile and apparel goods from China. The Administration’s proposed rule would significantly limit the scope of goods eligible for the Section 321 de minimis program.

Enhancing Transparency in De Minimis Shipments

To assist in targeting problematic shipments and expediting the clearance of lawful shipments, the Administration will also solicit comments on a proposed rule that would require submission of more detailed information in order to use the de minimis exemption. Currently, these shipments can be entered through informal entries by providing the bill of lading or a manifest that outlines the shipment’s origin, the consignee, and details about the merchandise’s quantity, weight, and value. The additional data points required would include the tariff classification number and the identity of the individual claiming the exemption. The Administration asserts that these requirements will protect US business from unfair competition against imported goods that would otherwise be subject to duties and will facilitate US Customs and Border Protection’s (CBP) ability to detect the illicit goods at the border.

Protecting Consumers From De Minimis Shipments

The Administration also announced that the CPSC plans to propose a final rule that would require importers of consumer products to electronically file CoC with CBP and CPSC upon entry, including de minimis shipments. This action is intended to prevent foreign companies from exploiting the de minimis exemption to circumvent consumer protection testing and certification requirements.

Focus on Textiles

The Administration has committed to prioritizing enforcement efforts to prevent importation of illicit shipments of textile and apparel imports through increased targeting of de minimis shipment, more customs audits and verification, as well as the expansion of the UFLPA Entity List.

The Administration’s focus on the textile and apparel industry follows DHS’s enforcement initiative to curb illicit trade to support American textile jobs. Since the DHS announcement in April, we have seen a notable increase in enforcement actions such as CBP requests for information, risk assessment questionnaires, and detentions under the UFLPA.

Potential Legislative Implications

The Administration has also advocated for further legislative action by Congress including:

  • Exclusion of import-sensitive products such as textiles from the de minimis exemption, the exclusion of shipments containing products covered by certain trade enforcement actions, and the passage of previously proposed de minimis reforms.
  • Legislation that would expedite the process of excluding products covered by Sections 301, 201, and 232 from the de minimis exemption.
  • Reforms in the previously introduced Detect and Defeat Counter-Fentanyl Proposal, which would require more data from shippers under the de minimis program and strengthen the CBP’s ability to detect and seize illicit drugs and raw materials.

What This Means for Retailers and How We Can Help

The Administration’s notice of proposed rulemaking suggests that changes to the de minimis program are on the horizon. For e-commerce retailers, these changes could mean a shift in how they manage their imports. Stricter eligibility criteria and enhanced enforcement may require more diligent documentation and compliance efforts. Retailers should stay informed about these proposed changes and prepare to adapt their operations accordingly.

© 2024 ArentFox Schiff LLP
For more on De Minimis Exception, visit the NLR Antitrust Trade Regulation section

USTR Finalizes New Section 301 Tariffs

The United States Trade Representative (USTR) published a Federal Register notice detailing its final modifications to the Section 301 tariffs on China-origin products. USTR has largely retained the proposed list of products subject to Section 301 tariffs announced in the May 2024 Federal Register notice (see our previous alert here) with a few modifications, including adjusting the rates and implementation dates for a number of tariff categories and expanding or limiting certain machinery and solar manufacturing equipment exclusions. USTR also proposes to impose new Section 301 tariff increases on certain tungsten products, polysilicon, and doped wafers.

The notice, published on September 18, 2024, clarifies that tariff increases will take effect on September 27, 2024, and subsequently on January 1, 2025 and January 1, 2026 (Annex A). The final modifications to Section 301 tariffs will apply across the following strategic sectors:

  • Steel and aluminum products – increase from 0-7.5% to 25%
  • Electric vehicles (EVs) – increase from 25% to 100%
  • Batteries
    • Lithium-ion EV batteries – increase from 7.5% to 25%
    • Battery parts (non-lithium-ion batteries) – increase from 7.5% to 25%
    • Certain critical minerals – increase from 0% to 25%
    • Lithium-ion non-EV batteries – increase from 7.5% to 25% on January 1, 2026
    • Natural graphite – increase from 0% to 25% on January 1, 2026
  • Permanent magnets – increase from 0% to 25% on January 1, 2026,
  • Solar cells (whether or not assembled into modules) – increase from 25% to 50%
  • Ship-to-shore cranes – increase from 0% to 25% (with certain exclusions)
  • Medical products
    • Syringes and needles (excluding enteral syringes) – increase from 0% to 100%
    • Enteral syringes – increase from 0% to 100% on January 1, 2026
    • Surgical and non-surgical respirators and facemasks (other than disposable):
      • increase from 0-7.5% to 25%; increase from 25% to 50% on January 1, 2026
    • Disposable textile facemasks
      • January 1, 2025, increase from 5% to 25%; increase from 25% to 50% on January 1, 2026
    • Rubber medical or surgical gloves:
      • increase from 7.5% to 50% on January 1, 2025; increase from 50% to 100% on January 1, 2026
    • Semiconductors – increase from 25% to 50% on January 1, 2025

USTR adopted 14 exclusions to temporarily exclude solar wafer and cell manufacturing equipment from Section 301 tariffs (Annex B), while rejecting five exclusions for solar module manufacturing equipment proposed in the May 2024 notice. The exclusions are retroactive and applicable to products entered for consumption or withdrawn from warehouse for consumption on or after January 1, 2024, and through May 31, 2025. USTR also granted a temporary exclusion for ship-to-shore gantry cranes imported under contracts executed before May 14, 2024, and delivered prior to May 14, 2026. To use this exclusion, the applicable importers must complete and file the certification (Annex D).

With respect to machinery exclusion, USTR added five additional subheadings to the proposed 312 subheadings to be eligible for consideration of temporary exclusions. USTR did not add subheadings outside of Chapters 84 and 85 or subheadings that include only parts, accessories, consumables, or general equipment that cannot physically change a good. USTR will likely issue additional guidance to seek exclusions of products under these eligible subheadings.

Importers should assess the (i) table of the tariff increases for the specified product groups (Annex A), (ii) temporary exclusions for solar manufacturing equipment (Annex B), (iii) the Harmonized Tariff Schedule of the United States (HTSUS) modifications to impose additional duties, to increase rates of additional duties, and to exclude certain solar manufacturing equipment from additional duties (Annex C), (iv) Importer Certification for ship-to-shore cranes entering under the exclusion (Annex D), and (v) HTSUS subheadings eligible for consideration of temporary exclusion under the machinery exclusion process (Annex E). The descriptions set forth in Annex A are informal summary descriptions, and importers should refer to the HTSUS modifications contained in Annex C for the purposes of assessing Section 301 duties and exclusions.

Importers should also carefully review the final list of products subject to the increased Section 301 tariff, with their supply chains, to identify products subject to increases in tariff rates as a result of the recent of USTR and consider appropriate mitigation strategies.

© 2024 Miller, Canfield, Paddock and Stone PLC
For more news on Section 301 Tariffs, visit the NLR Antitrust Trade Regulation section.

End of Summer Pool Party: CFTC Approves Final Rule Amending 4.7 Regulatory Relief for CPOs and CTAs

On 12 September 2024, the Commodity Futures Trading Commission (CFTC) published a Final Rule impacting registered commodity pool operators (CPOs) and commodity trading advisors (CTAs) relying on the regulatory relief provided under CFTC Regulation 4.7. “Registration light,” as Regulation 4.7 is sometimes known, provides reduced disclosure, reporting and recordkeeping obligations for CPOs and CTAs that limit sales activities to “qualified eligible persons” (QEPs).

The Final Rule amends Regulation 4.7 by:

  • Updating the QEP definition by increasing the financial thresholds in the “Portfolio Requirement” to account for inflation; and
  • Codifying certain CFTC no-action letters allowing CPOs of Funds of Funds to opt to deliver monthly account statements within 45 days of month-end.

For most asset managers, however, the most significant update is that the CFTC declined to adopt the proposed minimum disclosure requirements. Under existing Regulation 4.7, CPOs and CTAs are exempt from certain disclosure requirements when offering pools solely to QEPs. Without those exemptions, dually-registered managers would be burdened with duplicate or conflicting disclosure requirements under the Securities and Exchange Commission’s (SEC) rules. The Proposed Rule would have rescinded or narrowed certain of these exemptions. Commenters almost unanimously opposed the disclosure-related amendments, and the CFTC ultimately decided to take additional time to consider the concerns and potential alternatives.

The Final Rule doubled the Portfolio Requirement for the Securities Portfolio Test and the Initial Margin and Premium test to US$4,000,000 and US$400,000, respectively. Despite the increased suitability standards for QEPs, the Final Rule will not impact most private funds relying on Rule 506 of Regulation D, as those amounts are still less than the “Qualified Purchaser” threshold under the SEC’s rules.

Copyright 2024 K & L Gates
For more news on CFTC Final Rule, visit the NLR Antitrust Trade Regulation section.

FTC Staff Issue Report on Multi-Level Marketing Income Disclosure Statements

Staff reviewed income disclosure statements in February 2023 that were publicly available on the websites of a wide array of MLMs, from large household names to smaller, less well-known companies, according to FTC attorneys. “These statements are sometimes provided to consumers who are considering joining MLMs, and often purport to show information about income that recruits could expect to receive.”

According to the report, FTC staff found a number of issues with the statements they reviewed, including that most omit key information when calculating the earnings amounts they present. Specifically, the report notes that most of the reviewed statements do not include participants with low or no earnings in their display of earnings amounts and also don’t account for the expenses faced by participants, which can outstrip the income they make. The report notes that these omissions are often not plainly disclosed in the income statements.

The report also notes that most statements emphasize the high earnings of a small group of participants, and many entirely omit or only inconspicuously disclose key information about the limited earnings made by most participants. In addition, the staff report notes that most of the disclosure statements staff reviewed present earnings information in a potentially confusing way, “like giving average earnings amounts for groups that could have very different actual incomes, or using annual income figures that aren’t based on what an actual group of participants made for the year.”

The report also notes based on staff’s analysis of data in the income disclosure statements, including information included in fine print, that many participants in those MLMs received no payments from the MLMs, and the vast majority received $1,000 or less per year—that is, less than $84 per month, on average.

“The FTC staff report documents an analysis of 70 publicly available income disclosure statements from a wide range of MLMs — big and well-known to smaller companies. The report found that these income disclosure statements showed most participants made $1,000 or less per year — that’s less than $84 dollars per month. And that may not account for expenses. In at least 17 MLMs, most participants didn’t make any money at all.”

As referenced above, the staff report documents (and provides numerous examples of) how most of the publicly available MLM income disclosure statements used all the following tactics:
  • Emphasizing the high dollar amounts made by a relatively small number of MLM participants.
  • Leaving out or downplaying important facts, like the percentage of participants who made no money.
  • Presenting income data in potentially confusing ways.
  • Ignoring expenses incurred by participants — even though expenses can, and in some MLMs often do, outstrip income.
© 2024 Hinch Newman LLP