Category: Supply Chain

War and Peace at Rospatent: Protecting Trademarks in Russia

Yes, we shall live, Uncle Vanya. Could Anton Chekhov ever have imagined that his literary work would be used to sell hamburgers? In March, a controversial application for an “Uncle Vanya” mark in connection with “snack bars, cafes, cafeterias, restaurants, bar services, canteens, cooking and home delivery services,” incorporated the red-and-yellow golden arches logo of McDonald’s. It was just one in a series of recent applications in Russia that have caused serious pearl-clutching among intellectual property lawyers.

Since Russia invaded Ukraine on February 24, the country has faced numerous financial, trade and travel sanctions. It’s also been snubbed by major intellectual property partners. In a February 28 letter, a group of whistleblowers and staff representatives at the World Intellectual Property Organization (WIPO) called for the entity’s public condemnation of Russia’s invasion of Ukraine and the rapid closure of its Russia Office. The European Patent Office severed ties with Russia on March 1, and shortly thereafter the United States Patent and Trademark Office (USPTO) confirmed that it had “terminated engagement” with officials from Russia’s agency in charge of intellectual property, the Federal Service for Intellectual Property (Rospatent), and with the Eurasian Patent Organization.

In response, Russia has adopted an aggressive posture in the intellectual property realm where it once sought to peacefully engage with the world, an effort that began well before the collapse of the Union of Soviet Socialist Republics. When the USSR joined the Paris Convention in 1965, it eagerly sought to develop Soviet intellectual property. Yet in March, Russia issued Decree No. 299, which effectively nullifies the enforcement value of Russian patents owned by entities and individuals in “unfriendly” countries including the United States, European Union member states, the United Kingdom, Ukraine, Japan, South Korea, Australia and New Zealand.

Russian Prime Minister Mikhail Mishustin also greenlighted the importation of branded products without the brands’ permission, creating gray market headaches. As Boris Edidin, deputy chairman of the Commission for Legal Support of the Digital Economy of the Moscow Branch of the Russian Bar Association, clarified in a recent legal commentary published by Moscow-based RBC Group: “entrepreneurs have the opportunity to import goods of well-known brands, regardless of the presence or absence of an official representative on the Russian market.”

Russia, like the EU, had traditionally adopted a tougher stance than the United States on parallel imports. Now, however, “both by ‘anti-crisis’ measures and by cloak-and-dagger methods” Russia is sure to do all it can to keep its planes flying and its factories running, said Peter B. Maggs, research professor of law at the University of Illinois at Urbana-Champaign and noted expert on Russian and Soviet law and intellectual property.’

The increase in parallel imports makes trademark prosecution and maintenance more important than ever in Russia, but it’s not the only cause for concern. In March, as political tensions reached a crescendo, a Russian court declined to enforce the trademark rights for Peppa Pig, the famous British cartoon character, due to “unfriendly actions of the United States of America and affiliated foreign countries.” (See case No. A28- 11930/2021 in the Arbitration Court of the Kirov Region; an appeals court later overturned this holding, in a win for the porcine star.) RBC Group reported in March that it had tracked more than 50 trademark applications by Russian entrepreneurs and businesses for the marks of famous foreign brands, many in the fashion and tech sector. While most trademark applications were explicit copies of existing brands, in other cases applicants were content to imitate well-known trademarks and trade dress.

For example, a Russian entrepreneur from a design studio called Luxorta applied to register an IDEA brand that mimics the style and yellow-and-blue color schemes of famous Swedish brand IKEA. He told RBC that his business had suffered after IKEA suspended its Russian operations, and that he aspired to develop his own line of furniture and work with IKEA’s former suppliers. Other applicants RBC interviewed indicated they hoped to sell the marks back to foreign companies once those companies return.

On April 1, Rospatent published a press statement clarifying that “in case an identical or similar trademark has already been registered in the Russian Federation, it would be the ground for refusal in such registration.” More recently, the head of Rospatent, Yury Zubov, has responded with frustration to news coverage of trademark woes in Russia, noting that intellectual property legislation is unchanged and the “Uncle Vanya” hamburger mark had been withdrawn.

Prof. Maggs agreed that those trying to register or use close copies of foreign marks in Russia will likely fail. He cited a June 2 decision by the Court of Intellectual Property Rights to uphold lower court findings that the mark “FANT” for a carbonated orange soft drink violated unfair competition laws, because it was confusingly similar to the “FANTA” brand owned and licensed to third parties by Coca-Cola HBC Limited Liability Company. Russia’s consumer protection agency had originally brought the case.

The Court reasoned that “confusion in relation to two products can lead not only to a reduction in sales of the FANTA drink and a redistribution of consumer demand, but can also harm the business reputation of a third party, since the consumer, having been misled by the confusion between the two products, in the end receives a different product with different quality, taste and other characteristics.”

In addition, Prof. Maggs said, “the Putin Regime is and will be promoting Russian products as ‘just as good’ as foreign products. An example, obviously approved at high levels is the adoption of a totally different trademark for the sold McDonald’s chain,” he said, referring to the June 12 reopening of former McDonald’s restaurants in Moscow under the name “Vkusno & tochka” (“Tasty and that’s it”).

Brands should be wary of inadvertently jeopardizing their Russian marks by suspending local operations; a trademark may be cancelled in Russia after three years of uninterrupted non-use. While Article 1486 of the Russian Civil Code states that “evidence presented by the rightholder of the fact that the trademark was not used due to circumstances beyond his control [emphasis added] may be taken into account,” brands claiming infringement still risk being ineligible for damages or injunctive relief, because technically they are not losing sales while pausing business in Russia.

Moreover, if a company has suspended sales in Russia to show solidarity with Ukraine but seeks to stop sales in Russia by others, it may be accused of violating the good faith requirement of Article 10 of the Russian Civil Code, which states that exercising “rights for the purpose of limiting competition and also abuse of a dominant position in a market are not allowed.”

Russia remains a party to numerous intellectual property treaties, including the Paris Convention, the Agreement on TradeRelated Aspects of Intellectual Property Rights and the Hague Agreement. But as the Peppa Pig case illustrates, court decisions on intellectual property are not immune to political heat.

The question looming on the horizon is whether, if the current crisis escalates, the Russian government would outright cancel trademarks from hostile countries. It would not be the first time a state denied intellectual property rights during political conflicts. In the aftermath of the First World War, for example, the US government advocated for the “expropriation” of property, including intellectual property, of German nationals, perceived as responsible for the militarism of their government1. And in the 1930s, the German patent office removed Jewish patent-holders from its roster as part of its notorious “Aryanization” process. However, because Russia is not officially at war with the countries it has deemed “unfriendly,” these precedents are not directly on point.

Brands that have suspended business operations in Russia should monitor their trademark portfolios closely for infringement and consider how they can prove use of each mark during a prolonged absence from the Russian market. In other words: keep your eyes on Uncle Vanya.

FOOTNOTES

1 Caglioti DL. Property Rights in Time of War: Sequestration and Liquidation of Enemy Aliens’ Assets in Western Europe during the First World War. Journal of Modern European History. 2014;12(4):523-545. doi:10.17104/1611-8944_2014_4_523.

Article By Cynthia Martens of Katten

For more intellectual property legal news, click here to visit the National Law Review.

©2022 Katten Muchin Rosenman LLP

Uyghur Forced Labor Prevention Act Takes Effect: What Importers Need to Know

The Uyghur Forced Labor Prevention Act (UFLPA) is in effect as of June 21, 2022. Congress passed the Act in December 2021 to increase enforcement of longstanding U.S. policy prohibiting the importation of goods, or components thereof, made with forced labor and to create a “rebuttable presumption” that merchandise from the Xinjiang Uyghur Autonomous Region (XUAR) or by an entity on the UFLPA Entity List is made with forced labor and thereby prohibited from entry into the United States. The rebuttable presumption applies to downstream products that incorporate inputs from XUAR, regardless of where the finished products are manufactured, including goods from outside XUAR in the People’s Republic of China (PRC), or in third countries. There is no de minimis provision in the law – any prohibited content, no matter how small, will make a product subject to the rebuttable presumption made by the law. If an importer can demonstrate by “clear and convincing” evidence that the goods were not produced wholly or in part by forced labor, U.S. Customs and Border Protection (CBP) will grant an “exception” to the presumption. The UFLPA provides for increased detentions and seizures of merchandise and potential civil and criminal penalties. See prior GT Alerts on the UFLPA.

Pursuant to the UFLPA, a multi-agency task force chaired by the Department of Homeland Security was mandated to develop a strategy for the Act’s implementation. On June 17, in anticipation of the June 21 effective date, DHS released the “Strategy to Prevent the Importation of Goods Mined, Produced, or Manufactured with Forced Labor in the People’s Republic of China” (Enforcement Strategy), which includes:

  • An assessment of risk of importing goods mined, produced, or manufactured, wholly or in part, in the PRC; according to the strategy, complex supply chains that touch XUAR are “highly susceptible to contamination by goods made using forced labor.”
  • A list of entities affiliated with forced labor; therefore, their products are subject to the presumption that their goods are prohibited from entry. The Entity list will be updated multiple times per year and will be publicly available.
  • A list of high priority sectors and products including apparel and textiles, cotton and cotton products, polysilicon, and tomato products. Other products listed include footwear, nails, electronics, and toys.
  • Guidance to importers advising that companies need heightened due diligence to ensure compliance with UFLPA and to identify potential supply chain exposure to Xinjiang. Supply chain tracing is the general method to demonstrate that goods are free of inputs from Xinjiang, but CBP expects that barriers to supply chain tracing may make it difficult for importers to be compliant and has stated that third-party audits alone are insufficient to demonstrate due diligence.

Should CBP detain goods on suspicion of being made wholly or in part with forced labor, the importer has options. It can re-export the goods (up until CBP seizes them); it can abandon the goods; it can seek an “exception” for the goods, to get them released from CBP custody; it can also provide information to CBP demonstrating that the goods are not subject in any way to the Act. The evidence and documentation needed for the latter two must be “clear and convincing.”

It should be noted that in order to obtain an “exception” for goods that have been detained, an importer must meet all three of the following requirements:

  • Provide clear and convincing evidence that the detained goods were not made in whole or in part with forced labor, or were sourced from entities on the Entity List.
  • Fully and substantively respond to any questions from CBP.
  • Show that it has complied with all of the requirements set out in the Enforcement Strategy and CBP’s Operational Guidance (i.e., due diligence, supply chain tracing and management, etc.).

The Enforcement Strategy document provides importers with guidance in the following three areas:

  • Due diligence, effective supply chain tracing, and supply chain management measures to ensure that no goods violating the Act enter the importer’s supply chain.
  • The type, nature, and extent of evidence that demonstrates that goods originating in China were not mined (or grown), produced, or manufactured wholly or in part in Xinjiang.
  • The type, nature, and extent of evidence that demonstrates goods originating in China, including goods detained under Section 307 of the Tariff Act, were not mined (or grown), produced, or manufactured wholly or in part with forced labor.

CBP has made it clear that should there be a detention, participants in the Customs and Trade Partnership Against Terrorism program (C-TPAT) will be prioritized for review of submissions to rebut the presumption that the merchandise was made with forced labor.

Importers may wish to plan for contingencies should CBP detain imported merchandise, map complex supply chains and review purchase agreements and supplier codes of conduct.

Article By Laura Siegel Rabinowitz and Donald S. Stein of Greenberg Traurig, LLP

For more legislative legal news, click here to visit the National Law Review.

©2022 Greenberg Traurig, LLP. All rights reserved.

Auto Industry Picks up Capitol Hill Advocacy on Reports of Resurgence of Biden’s Build Back Better (BBB) Proposal

Last week, General Motors Chair and CEO Marry Barra, Toyota Motor North America President and CEO Ted Ogawa, Ford Motor Company CEO James Farley, and Stellantis CEO Carlos Taveres sent a letter to Senate Democratic Leader Chuck Schumer, Senate Republican Leader Mitch McConnell, House Speaker Nancy Pelosi, and House Minority Leader Kevin McCarthy revamping the industry’s advocacy for the inclusion of certain production tax credits ahead of a possible budget reconciliation package.

This letter comes on the heels of recent reports on Capitol Hill that the lynchpin to the Senate passing a budget reconciliation package, Senator Joe Manchin (D-WV), has had multiple in person conversations with Senate Democrat Leader Chuck Schumer regarding a legislative path forward on the proposal.

The letter specifically advocated for the inclusion in any final BBB proposal of House-passed legislation, authored by Congressman Dan Kildee (D-MI-05) and Senator Debbie Stabenow (D-MI) which would extend and build on current tax credits for EVs. Specifically, the provision would make consumers eligible for a $7,500 credit for eligible EV purchases for the first five years and an additional $4,500 credit if the EV is manufactured by a unionized facility, and an additional $500 credit if the EV uses an American made battery. In addition, the proposal would amend the current credit authority to make the credits refundable and transferrable at the time of purchase rather than consumers having to claim the credit on their tax return. Finally, the proposal would bar consumers making over $400,000 from eligibility and creates EV price limits to preclude luxury EVs from eligibility.

While this provision enjoys broad Democrat support in the Senate, Senator Manchin, foreign automakers and Tesla have publicly criticized the $4,500 bonus for union made vehicles.

Additional Electric Vehicle Infrastructure funding that could be included in the bill include:

  • Electric Vehicle Supply Equipment Rebate Program –$2 billion for eligible entities for covered expenses associated with EV supplies including grounding conductors, attachment plugs and other fittings, electrical equipment, batteries, among other things;
  • Electric Vehicle Charging Equity Program – $1 billion to provide technical assistance, education and outreach, or grants for projects that increase deployment and accessibility of EV supply equipment in underserved or disadvantaged communities;
  • General Services Administration Clean Vehicle Fleet program – $5 billion for GSA for the procurement of EVs and related infrastructure for the Federal Fleet (excluding USPS and DOD vehicles);
  • United States Postal Service Clean Vehicle Fleet and Facility Maintenance – $3 billion for the USPS to purchase electric delivery vehicles and $4 billion for the purchase of related infrastructure; and
  • District of Columbia Clean Vehicle Fleet – $10 million for the District of Columbia for the procurement of EVs and related infrastructure.

While it is unclear what would be in a final BBB deal or if it would have the votes to pass the House and the Senate, industry representatives are descending on Capitol Hill to push for critical funding and tax provisions that could have significant benefits to their respective industries, especially those provisions that could lower costs for producers and consumers in the current economic climate.

Article By William Ball of Foley & Lardner LLP

For more utilities and transportation legal news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

States Target Infant Formula Price Gouging

There has been a nationwide shortage of infant formula following a recall and temporary closure of a major infant formula manufacturing facility in February 2022. This facility supplied as much as 40% of the nation’s infant formula. In the wake of these events, state attorneys general are on the lookout for unlawful price gouging of infant formula. Sellers of infant formula should make sure that they do not inadvertently run afoul of state price gouging restrictions.

State price gouging laws prohibit price increases above certain thresholds during a period of emergency. Several state governments have recently issued declarations or proclamations that trigger price increase limitations for infant formula, including in California (CA Exec. Order N-10-22, 6/7/2022), Oregon (OR Exec. Procl., 5/13/2022), Colorado (CO Exec. Order D-2022-021, 5/25/2022), New Jersey (NJ Exec. Order No. 296, 5/17/2022), and Kentucky (KY Exec. Order 2022-321, 6/9/2022). Each of these states has a different price gouging restriction. For instance, infant formula sold in California cannot exceed the February 17, 2022 price by more than 10% except in certain limited circumstances. Other states may have a different price increase threshold or a different benchmark date. Multi-state sellers must take care to comply with the restrictions in each state.

Several states, such as Colorado and Nevada, enacted new price gouging laws in the wake of the COVID-19 pandemic. See Colo. Rev. Stat. § 6-1-730; NRS § 598.09235. Enforcers have not had much experience enforcing these statutes, which may mean greater uncertainty for sellers in those states.

Most, but not all states have a price gouging law. In states that do not have a price gouging law, attorneys general will often seek to enforce their state’s unfair or deceptive trade practices act against reports of price gouging. For example, the attorney general of New Mexico, a state without a price gouging law, issued a press release on May 31, 2022 announcing that he is investigating complaints regarding infant formula price gouging. Similar to the COVID-19 pandemic, the infant formula shortage is triggering a variety of different price gouging restrictions in different states at the same time. Navigating the differences from state-to-state can be challenging, particularly in light of the new laws and amended laws that have been recently enacted. Sellers should review their normal pricing practices and make necessary changes to avoid inadvertently running afoul of the restrictions in a particular state.

Article By Leo Caseria and Thomas L. Tyson of Sheppard, Mullin, Richter & Hampton LLP

For more antitrust and trade regulation legal news, click here to visit the National Law Review.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

Inflation Woes: Four Key Ways for Companies to Address Inflation in the Supply Chain

The U.S. economy is grappling with the highest inflation in decades, with extensive inflation in the supply chain affecting companies worldwide. Supply chain disruptions undoubtedly have contributed to rising inflation, as extensive delays and skyrocketing costs continue to plague the industry.

In March 2022, the consumer-price index (or CPI) — a measure of the prices consumers pay for products — rose at an annual rate of 8.5%, which is the highest increase in 47 years.1 Meanwhile, the producer-price index (or PPI) — a measure of inflation meant to gauge the impact on suppliers — similarly rose significantly at an annual rate of 11.2%.2 Finally, the employer cost index (or ECI) demonstrates that, from March 2021 to March 2022, total compensation rose 4.5%, wages and salaries rose 4.7%, and benefit costs rose 4.1%.3

Because inflation increases the prices of goods or services, negotiations about who bears that risk in business partner relationships and the consequences of that risk allocation will have significantly greater financial impacts than we have seen in recent memory. As a result, ensuring your business teams are well versed on the impacts of and means of mitigating inflation in new contracts has a direct impact on your bottom line.

In this article, we provide ways for companies in the supply chain to address high inflation and alleviate associated pressures, including (1) how to revisit and use existing agreement provisions to address inflation risk, (2) approaches to negotiating new agreements and amendments to existing agreements, (3) approaches to limit inflationary exposure, and (4) strategies for cost reduction.

Figure 1:

Percent Change in CPI March 2021 versus March 2022

CPI March Chart

Bureau of Labor Statistics, U.S. Department of Labor, Consumer Price Index – March 2022, issued April 12, 2022

Four Key Ways to Mitigate the Effects of Increasing Inflation in the Supply Chain

1. Revisit and Use Provisions in Existing Agreements

Companies faced with rising costs must review their supply agreements to determine if they already contain mechanisms the company can use to address inflation. On the buy side, companies should look in their agreements for terms relating to fixed prices. On the sell side, companies should investigate ways to pass increased costs on to customers. Most supply contracts contain a variety of provisions that may assist in combatting inflationary pressures.

(a) Pricing Provisions

From a seller’s perspective, a contract may include index-based price escalation provisions, which tie contract prices to one or more indices. The underlying indices may be (i) broad economic indices such as the PPI or “market basket” indices tied to all items and all urban consumers, (ii) targeted indices such as ECI for a specific location, or (iii) tied to the cost of a specific commodity used in the underlying product. Contracts will sometimes incorporate several commodity indices based on the percentage those commodities are used in the product that is the subject of the agreement, in order to accurately reflect the costs associated with producing the good.

Allocations under these pricing provisions vary depending on negotiation power. They could put all of the risk on one party, share the risk equally, or share the risk according to particular percentages. The latter two options represent ways to avoid a “win/lose” approach.

Sellers will want to see whether their agreements allow for periodic negotiations for updated prices and take advantage of those opportunities. A buyer, meanwhile, may look for provisions that allow it the flexibility to limit the quantities ordered, enabling it to reduce costs as necessary or to seek a more cost efficient alternative. A buyer also will want to determine if the contract prohibits the seller from changing prices.

Regardless of the existing provisions, the real impact of inflation is likely to trigger commercial discussions to address rising costs; this is true both for hard goods supply agreements and indirect services agreements with longer terms such as outsourcing and managed services relationships.

(b) Force Majeure as a Mechanism to Adjust Price?

Outside of pricing provisions such as the above, however, a party may look to other contract provisions, such as force majeure, to see if its performance under the contract could be excused; increased costs alone are not enough to constitute a force majeure event. In order for a force majeure to arguably apply, the increase in costs must be caused by an event that itself is a qualifying force majeure event under the terms of the applicable contract (which may include events like a labor strike or pandemic).

Force majeure provisions are intended to excuse performance under a contract but not to act as a pricing adjustment mechanism. However, force majeure and its extra-contractual cousin, commercial impracticability, can be used as tools to bring the parties to the negotiating table where events beyond either party’s reasonable control are impacting the ability to produce and deliver products.

2. Negotiate Amendments to Existing Agreements

To the extent sellers have fixed-price contracts with their customers, sellers should consider negotiating with such customers to adjust these contracts in order to keep the prices they charge their customers in line with their input costs. When entering these discussions, companies that wish to implement a price adjustment, or eliminate fixed pricing entirely, should consider meaningful ways to incentivize their customers to agree to such changes. Would the customer be willing to agree to a price adjustment in order extend the agreement or adjust the quantity? Any items that maintain the relationship between the parties while also allocating cost increases in an equitable way should be considered.

Conversely, buyers faced with price-increase requests should carefully consider their options:

  • First, a customer receiving a price-adjustment request should confirm the request is actually tied to inflation and not just an attempt by a supplier to increase its bottom line. Seek detailed calculations supporting the price adjustments, and require suppliers to demonstrate how much their costs have increased above expectations.
  • Second, customers should consider what items they would like to request in return for accepting a given price-adjustment request, such as whether they would like to adjust their quantity or timing of delivery.
  • Third, a customer faced with a price increase request should consider whether the request should include the opportunity for the customer to obtain pricedowns in the future, in the event there are changes in the pricing environment.

3. Pricing Tied to Indexing and Other Ways to Limit Future Inflationary Exposure when Drafting New Agreements

When drafting new agreements, companies should consider how best to mitigate the effects of inflation.

For nearly 40 years, we have enjoyed relatively low and steady levels of inflation, which explains why existing agreements may not adequately address the allocation of significant and unexpected economic change.

Many of those at the upper echelons of leadership today have never dealt with a high inflationary environment. To put it in perspective, the CEO of Walmart, the No. 1 company on the Fortune 500 list for 2021, was 19 years old when inflation was last a newsworthy topic.

In the future, however, we expect far fewer agreements to have long-term fixed prices, as sellers negotiating agreements will want to incorporate a variety of strategies that allow for pricing flexibility and avoid longstanding, fixed prices. One such strategy is tying prices to an index. As discussed above, this could be a general index such as the CPI or PPI or be much more specific depending on the item sold. There are numerous indices for various products and commodities that parties may use to reflect accurately the costs of producing the goods that are the subject of their agreement. Parties may consider incorporating a mechanism for revisiting these provisions, especially in the event that inflation slows. Caps on inflation risk also may be incorporated as a backstop.

If not tying prices to an index, selling parties will want to shorten the term of their agreements or require the parties to renegotiate prices at set points throughout the duration of their agreements. Alternatively, parties may consider price increases of a certain percentage that are automatically implemented periodically. The seller may even want to leave the pricing open and establish pricing at the time the order is placed.

On the other hand, customers will want to incorporate provisions that cause the supplier to bear the inflationary risk. Principally, this means locking in prices for as long of a period as the seller will agree to and ensuring prices are fixed upon the issuance of purchase orders.

If and when sellers push back on extended fixed-pricing provisions, there are a variety of methods parties may use to meet in the middle:

  • Pricing arrangements that are tied to one or more indices may be capped to a certain percentage, ensuring the customer will know its upward exposure.
  • Include thresholds of index movement such that the price remains static unless and until the percentage threshold is exceeded.
  • Allocate increased cost exposure so a certain percentage range of index movement is allocated to one party and then the next percentage range is allocated to the other party. Parties then may share any exposure above those ranges.
  • Additionally, index-based pricing can be clarified to include both upward and downward movement, ensuring that customers, while risking inflationary costs, may also receive the benefits of deflationary environments.

4. Think Strategically to Reduce Costs

Aside from considering purely contractual methods to combat inflation, companies should think strategically about ways to reduce costs more efficiently.

  • Streamlining. In order to pursue this strategy, companies need to determine which areas are driving increased spending and consider ways those areas may be managed differently. For example, companies may consider whether there are different inputs that can be used to lower costs or processes that may be streamlined. Companies can review their inventory management, labor inputs, and other areas to determine where cost cutting may be an option without sacrificing product or service quality. This streamlining might include ending product lines with lower levels of profitability.
  • Technology & Innovation. In addition, with labor constituting such a high percentage of the cost increases companies are experiencing, a company may want to double down on technology and innovation that reduces headcount. Or, as prices rise, a company may pursue other pricing models. For example, a heavy equipment manufacturer may opt for a pay-per-use model in lieu of the traditional sale model.
  • Diversification of the Supply Chain. Another method companies may use is diversifying their supply chains, ensuring they provide the flexibility and sustainability needed to weather turbulent periods. Though adding links to supply chains will not lower costs in the near term, it can help ensure a business continues to function smoothly even in the event of price shocks, material shortages, or other disruptions.

The stressors driving inflation are unlikely to be relieved any time soon. Companies should use every resource available to leverage their current contracts and negotiate new terms to address inflation’s serious repercussions on their bottom line.

FOOTNOTES

1 How High Is Inflation and What Causes It? What to Know, Wall Street Journal (April 12, 2022).

2 Supplier Prices Rose Sharply in March, Keeping Upward Pressure on U.S. Inflation, Wall Street Journal (April 13, 2022).

3  Employment Cost Index – March 2022, U.S. Department of Labor, Bureau of Labor Statistics (April 29, 2022).

Article By Vanessa L. Miller, Kathleen E. Wegrzyn, Leah R. Imbrogno, James R. Kalyvas, and Austin R. Kissinger of Foley & Lardner LLP

For more financial institutions and banking news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

Uyghur Forced Labor Prevention Act Is Coming… Are You Ready? CBP Issues Hints at the Wave of Enforcement To Come

US Customs and Border Protection (CBP) has issued some guidance relating to its enforcement of the Uyghur Forced Labor Prevention Act (UFLPA) prior to June 21, 2022, the effective date of the rebuttable presumption.

What to Know

  • US Customs and Border Protection (CBP) has issued some guidance relating to its enforcement of the Uyghur Forced Labor Prevention Act (UFLPA) prior to June 21, 2022, the effective date of the rebuttable presumption.
  • The new guidance imposes tighter timelines and a higher burden of evidence on importers to rebut the presumption that merchandise was produced with forced labor. If CBP does not make a decision within specific timeframes, goods will automatically be deemed excluded.
  • CBP is expected to issue additional technical guidance at the end of May or early June. The Department of Homeland Security (DHS) is also expected to issue guidance closer to June 21, 2022.
  • CBP is scheduled to host informational webinars detailing their UFLPA guidance in the coming weeks.

What’s New: Tighter Timelines  

While US importers were eagerly anticipating the issuance of technical guidance regarding implementation of the UFLPA from CBP last week, which is now expected this week, CBP did post a new guidance document summarizing the UFLPA and forced labor Withhold Release Orders (WRO) enforcement mechanisms. Specifically, CBP’s authority to detain merchandise under the UFLPA will be pursuant to 19 CFR § 151.16, which provides for a much different timeline for the detention of merchandise than the WRO process. Under this process, if Customs does not make a timely decision regarding admissibility, goods are automatically excluded.

UFLPA Timeline Enforcement under 19 CFR § 151.16

Number of Days

Actions
5 Days from Presentation for Examination

CBP must decide whether to release or detail merchandise

  • If the merchandise is not released, it is detained
5 Days after Decision to Release or Detain

CBP will issue a notice to importer advising them of:

  • The initiation of detention
  • Date merchandise examined
  • Reason for detention
  • Anticipated length of detention
  • Nature of tests and inquiries to be conducted
  • Information to accelerate disposition
  Upon written request, CBP must provide importer with testing procedures, methodologies used, and testing results
Within 30 Days of Examination

CBP will make a final determination as to the admissibility of merchandise

  • If CBP does not make a determination within the 30-day period, the merchandise will be deemed excluded
  • This means any submission to rebut the presumption should be made before this 30 day period
Within 180 Days of CBP Determination/Exclusion Importers may protest CBP’s final determination
Within 30 Days After Protest Submitted The protest is deemed denied if CBP does not grant or deny the protest within 30 days
Within 180 Days after the Date the Protest is Denied

The importer may commence a court action contesting the denied protest (28 U.S.C. § 1581(a))

  • In a court action, CBP must establish by a preponderance of the evidence that an admissibility decision has been reached for good cause
  • Customs can decide to grant the protest after the deemed denial but before a court case is filed

This is a much shorter timeline than the WRO process. Importantly, a company contesting CBP’s detention of merchandise pursuant to the UFLPA would be required to submit documentation to rebut the presumption within the 30-day period that CBP is assessing admissibility, whereas the WRO process permits 90 days. Like the WRO process, the importer may also file a protest 180 days after CBP makes its final determination regarding the exclusion.

CBP Listening Session: A Higher Burden of Evidence 

On Tuesday, May 24, 2022, CBP provided information regarding the publication of guidance and enforcement of the UFLPA:

  • CBP Publication of Guidance. CBP’s guidance regarding its enforcement of the rebuttable presumption and the UFLPA is scheduled to be published the week of May 30.
  • DHS Publication of Guidance. DHS guidance will be published on or about June 21, 2022, which will include information relating to supply chain due diligence, importer guidance, and the entity lists.
  • Clear and Convincing Evidence Required to Rebut the Presumption that Merchandise was Produced with Forced Labor. It was confirmed that the UFLPA will have a much higher burden of evidence required to rebut the presumption that merchandise was produced with forced labor than that of a WRO. Any exception to the rebuttable presumption must be reported to Congress, and thus the level of evidence that will be required to overcome the rebuttable presumption is very high. As a practical matter, it appears that very few detained entries will be released. Importers are advised to start conducting due diligence on supply chains in order to ensure that they will be able to obtain documentation should merchandise be detained once the rebuttable presumption goes into effect. Importantly, products that are subject to an existing WRO from Xinjiang will now be enforced under the UFLPA process instead of the WRO process.
  • Evidence Required if Merchandise is Detained. The forthcoming guidance will set forth information regarding how an importer may meet the exception to the rebuttable presumption and to demonstrate that merchandise was not produced with forced labor, by meeting the following three criteria:
    • Demonstrate compliance with the Forced Labor Enforcement Task Force/DHS strategy;
    • Demonstrate compliance with CBP’s guidance and any inquiries that CBP raises; and
    • Provide clear and convincing evidence that the supply chain in question is free of forced labor.
  • Binding Rulings. Importers may apply for a binding ruling to confirm or request an exception to the rebuttable presumption under the UFLPA. Although CBP is still finalizing the process for importers to apply for a binding ruling, importers would be required to prove by clear and convincing evidence that merchandise is not produced with forced labor. If the ruling is granted, it applies to future shipments for the specific supply chain in question.
  • Known Importer Letters and Detention Notices. Going forward, CBP will not issue Known Importer letters, and CBP will notify importers that merchandise is subject to the UFLPA through the issuance of detention notices.
  • Detention of Merchandise. If goods are detained by CBP because they are suspected of having a nexus to Xinjiang Uyghur Autonomous Region (XUAR) of the People’s Republic of China (PRC), importers may either provide clear and convincing evidence that merchandise was not produced with forced labor or export the products. If detained products that fall under the UFLPA are comingled with other products that are not subject to the UFLPA, importers may request the segregation of the merchandise that is not subject to the UFLPA.
  • Chain of CBP Review for Importer Submissions Relating to Detained Merchandise. Chain of CBP review for the request of an exception to the rebuttable presumption has not been finalized yet. However, importers will be required to submit evidence that rebuts the presumption that merchandise was produced with forced labor to the applicable CBP Port Director. For the moment, the CBP Commissioner is the final individual who can ultimately make an exception to the rebuttable presumption, but CBP is deciding if it will delegate this responsibility to any additional persons.

Upcoming CBP Informational Webinars

CBP will be holding three webinar sessions, all covering the same material, to discuss and review its guidance relating to the UFLPA. The dates of the webinars and the registration links are listed below.

Article By Angela M. Santos, Christine E. Hintze, and Jodi Tai of ArentFox Schiff LLP

For more immigration legal news, click here to visit the National Law Review.

© 2022 ArentFox Schiff LLP

If You Can’t Stand the Heat, Don’t Build the Kitchen: Construction Company Settles Allegations of Small Business Subcontracting Fraud for $2.8 Million

For knowingly hiring a company that was not a service-disabled, veteran-owned small business to fulfill a set aside contract, a construction contractor settled allegations of small business subcontracting fraud for $2.8 million.  A corporate whistleblower, Fox Unlimited Enterprises, brought this misconduct to light.  We previously reported on the record-setting small business fraud settlement with TriMark USA LLC, to which this settlement is related.  For reporting government contracts fraud, the whistleblower will receive $630,925 of the settlement.

According to the allegations, the general contractor and construction company Hensel Phelps was awarded a General Services Administration (GSA) contract to build the Armed Forces Retirement Home’s New Commons/Health Care Building in Washington, D.C.  Part of the contract entailed sharing the work with small businesses, including service-disabled, veteran-owned small businesses (SDVOSB).  The construction contractor negotiated all aspects of the contract with an unidentified subcontractor and then hired an SDVOSB, which, according to the settlement agreement, Hensel Phelps knew was “merely a passthrough” for the larger subcontractor, thus creating the appearance of an SDVOSB performing the work on the contract to meet the set-aside requirements.  The supposedly SDVOSB subcontractor was hired to provide food service equipment for the Armed Forces Retirement Home building.

“Set aside” contracts are government contracts intended to provide opportunities to SDVOSB, women-owned small businesses, and other economically disadvantaged companies to do work they might not otherwise access.  Large businesses performing work on government contracts are often required to subcontract part of their work to these types of small businesses.  “Taking advantage of contracts intended for companies owned and operated by service-disabled veterans demonstrates a shocking disregard for fair competition and integrity in government contracting,” said the United States Attorney for the Eastern District of Washington, as well as a shocking disregard for proper stewardship of taxpayer funds.

Whistleblowers can help fight fraud and protect taxpayers by reporting government contracts fraud.  A whistleblower can report government contracts fraud under the False Claims Act and become a relator in a qui tam lawsuit, from which they may be entitled to a share of the funds the government recovers from fraudsters.

Article By Eva Gunasekera and Renée Brooker at Tycko & Zavareei LLP

For more whistleblower legal news, click here to visit the National Law Review.

© 2022 by Tycko & Zavareei LLP

Beware OFAC in a Time of Sanctions

On Monday, April 25, 2022, the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”) announced a settlement with Toll Holdings Limited (“Toll”), an Australian freight forwarding and logistics company, with respect to Toll’s originations and/or receipt “of payments through the U.S. financial system involving sanctioned jurisdictions and persons.” Toll, which is not an American entity, and is neither owned by Americans nor located in the U.S. or any of its territories, was involved in almost 3000 transactions where payments were made in connection with sea, air, and rail shipments to, from, or through North Korea, Iran, or Syria, AND/OR involving the property of a person on OFAC’s Specially Designated Nationals and Blocked Persons List. OFAC did not have direct jurisdiction over Toll, BUT because the payments for Toll’s freight forwarding and logistics services flowed through U.S. financial institutions, Toll “caused the U.S. financial institutions to be engaged in prohibited activities with … sanctioned persons or jurisdictions.”

Each OFAC violation can be the basis of civil sanctions. Here the 2853 violation would have supported the imposition of civil sanctions totaling over $826 million. Toll was “happy” to settle OFAC’s enforcement action for $6 million. OFAC found that the Toll violations were “non-egregious,” in part due to the rapid growth of Toll after 2007 through acquisitions of smaller freight forwarding companies. OFAC noted that by 2017 Toll had almost 600 invoicing, data, payment, and other systems spread across its various units. OFAC also noted that Toll did not have adequate compliance procedures and procedures in place and did not attend to those issues until an unnamed bank threatened to cease doing business with Toll because Toll was using its U.S. dollar account to transact business with sanctioned jurisdictions and/or persons. OFAC took note of Toll’s voluntary self-disclosure, well-organized internal investigation, and extensive remedial measures.

OFAC traces its origins to the War of 1812, when the then Secretary of the Treasury imposed sanctions on the United Kingdom in retaliation for the impressment of American sailors. The Treasury Department has had a special office dealing with foreign assets since 1940 (and the outbreak of World War II), with statutory authority found in the Trading With The Enemy Act of 1917 (as World War I raged), and a series of federal laws involving embargoes and economic sanctions. OFAC received its current name as part of a Treasury Department order on October 15, 1962 (contemporaneous with the Cuban missile crisis).

The Toll settlement reflects the growing use by OFAC of public enforcement against foreign businesses for “causing” violations by involving U.S. payment systems. The use of U.S. dollars in any part of a transaction will typically involve the U.S. financial system, directly or indirectly – that subjects the entirety of the transaction to U.S regulatory jurisdiction, including that of OFAC. The Toll settlement evidences OFAC’s increasing willingness to exercise its expansive jurisdiction over foreign businesses, even those involving primarily extraterritorial transactions — for example, the increase in OFAC sanctions of foreign businesses seen as facilitating the Russian invasion of Ukraine.

Foreign businesses must give serious and continuing attention to having substantial policies and procedures in place to insure compliance with U.S. sanctions and, thereby, to avoid OFAC enforcement actions. Companies can start by reviewing OFAC’s Framework for Compliance Commitments and implementing the recommendations there. In addition, all parties to a transaction should be screened against sanction lists (OFAC’s, and also those of the U.K. and E.U.). Companies should consider adopting preventive measures, not only to deter violations, but also to demonstrate a vigorous compliance program.  Similarly, these issues MUST be considered as part of any merger or acquisition (as the Toll experience suggests).Finally, all counterparties, including financial intermediaries, should be evaluated for potential sanction list issues. Otherwise, a foreign business may have to “pay the Toll” for its shortcomings.

Experienced American business lawyers may prove helpful in designing and/or evaluating the compliance programs of non-U.S. companies.

Article By Peter D. Hutcheon of Norris McLaughlin P.A.

For more financial legal news, click here to visit the National Law Review.

©2022 Norris McLaughlin P.A., All Rights Reserved

Implications of the Use of the Defense Production Act in the U.S. Supply Chain

What owners, operators and investors need to know before accepting funds under the DPA

There has been an expansion of regulations related to Foreign Direct Investment (FDI) in both the United States and abroad. Current economic and geopolitical tensions are driving further expansion of FDI in the U.S. and elsewhere.

Whether by intent or coincidence, the Foreign Investment Risk Review Modernization Act (FIRRMA) regulations that took effect February 13, 2020, included provisions that expanded the Committee on Foreign Investment in the U.S. (CFIUS) and FIRRMA based upon the invocation of the Defense Production Act (DPA) – such as with President Biden’s recent Executive Order evoking the DPA to help alleviate the U.S. shortage of baby formula.

As background, the U.S. regulation of foreign investment in the U.S. began in 1975 with the creation of CFIUS. The 2007 Foreign Investment and National Security Act refined CFIUS and broadened the definition of national security. Historically, CFIUS was limited to technology, industries and infrastructure directly involving national security. It was also a voluntary filing. Foreign investors began structuring investments to avoid national security reviews. As a result, FIRRMA, a CFIUS reform act, was signed into law in August 2018. FIRRMA’s regulations took effect in February 2020.

It is not surprising that there are national security implications to U.S. food production and supply, particularly based upon various shortages in the near past and projections of further shortages in the future. What is surprising is that the 2020 FIRRMA regulations provided for the application of CFIUS to food production (and medical supplies) based upon Executive Orders that bring such under the DPA.

The Impact of Presidential DPA Executive Orders

The 2020 FIRMMA regulations included an exhaustive list of “critical infrastructure” that fall within CFIUS’s jurisdiction. Appendix A to the regulations details “Covered Investment Critical Infrastructure and Functions Related to Covered Investment Critical Infrastructure” and includes the following language:

“manufacture any industrial resource other than commercially available off-the-shelf items …. or operate any industrial resource that is a facility, in each case, that has been funded, in whole or in part, by […] (a) Defense Production Act of 1950 Title III program …..”

Title III of the DPA “allows the President to provide economic incentives to secure domestic industrial capabilities essential to meet national defense and homeland security requirements.” This was arguably invoked by President Trump’s COVID-19 related DPA Executive Orders regarding medical supplies (such as PPEs, tests and ventilators, etc.) and now President Biden’s Executive Order related to baby formula (and other food production).

Based on the intent of FIRRMA to close gaps in prior CFIUS coverage, the FIRRMA definition of “covered transactions” includes the following language:

“(d) Any other transaction, transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent the application of section 721.”

Taken together, the foregoing provision potentially gives CFIUS jurisdiction to review non-U.S. investments in U.S. companies covered by DPA Executive Orders that are outside of traditional M&A structures. This means that even non-controlling foreign investments in U.S. companies (such as food or medical producers) who receive DPA funding are subject to CFIUS review. More significantly, such U.S. companies can be subject to CFIUS review for a period of 60 months following the receipt of any DPA funding.

As a result of DPA-related FDI implications, owners, operators, and investors should carefully assess the implications of accepting funding under the DPA and the resulting restrictions on non-U.S. investors in businesses and industries not historically within the jurisdiction of CFIUS.

Article By David Vance Lucas of Bradley Arant Boult Cummings LLP

For more administrative and regulatory legal news, click here to visit the National Law Review.

© 2022 Bradley Arant Boult Cummings LLP

House Bill To Give FDA More Funding to Address Formula Shortage

  • On May 17, House Appropriations Committee Chair Rosa DeLauro (D-CT) introduced H.R. 7790, a supplemental appropriations bill to provide $28 million in emergency funding to address the shortage of infant formula in the US for the fiscal year ending September 30, 2022. The bill is intended to provide the FDA with needed resources to address the shortage, prevent fraudulent products from being sold, acquire better data on the infant formula marketplace, and to help prevent a future recurrence.

  • Representative DeLauro stated that FDA does not currently have an adequate inspection force to inspect more plants if it approves additional applications to sell formula in the US. Thus, the supplemental appropriations are intended for “salaries and expenses.”

  • Relatedly, the House Appropriations Committee will hold two hearings this week to examine the recent recall of infant formula, the FDA’s handling of the recall, and the nationwide infant formula shortage.

Article By Food and Drug Law Practice Group at Keller and Heckman LLP

For more food and drug law legal news, click here to visit the National Law Review.

© 2022 Keller and Heckman LLP