Category: Trade

FTC Takes First Actions Under New Made in USA Labeling Rule, Fining Battery Companies for Violations

The Federal Trade Commission (FTC) recently cracked down on Lithionics Battery, LLC, and Lions Not Sheep Products, LLC, for violating the FTC’s Made in USA Labeling Rule. These are some of the first enforcement actions after the FTC codified its longstanding informal Made in USA guidance, which makes it easier for the FTC to seek damages and levy fines. Under the proposed settlement, Lithionics will pay a $100,000 fine for falsely labeling batteries as US-made, while Lions Not Sheep will be required to pay $211,335 for falsely labeling clothing as US-made.

The Made in USA Labeling Rule

Under the Made in USA Labeling Rule, marketers suspected of making unqualified Made in USA claims must prove that their products:

  1. are all or virtually all made in the US;
  2. that all significant processing occurred in the US; and
  3. that the final assembly occurred in the US.

Although Congress enacted legislation authorizing the FTC to seek relief for Made in USA fraud almost thirty years ago, the FTC long remained silent on enforcement due to a general consensus that this specific type of fraud should not be penalized. The 2021 Made in USA Labeling Rule alters this perspective, codifying the FTC’s enforcement policy. With the Commission now being allowed to levy fines, seek damages, penalties, and/or redress on marketers who deceptively and fraudulently represent that their products are made in the US, the FTC has stepped up its enforcement efforts.

The FTC’s Recent Allegations with Lithionics and Lions Not Sheep

Lithionics

Lithionics is a Florida-based company best known for its battery products. The company has become a regular brand throughout American households. It designs and sells products for vehicles, as well as amusement parks.

The FTC alleged that Lithionics has been in violation of the Made in USA Labeling Rule since at least 2018 by intentionally misrepresenting the origin of Lithionics products. According to the Complaint, Lithionics’ products are labeled “Proudly Designed and Built in the USA” and feature an American flag. The claims were also featured across company websites, social media platforms, videos, and printed catalogs. However, according to the FTC, “all Lithionics battery and battery module products contain imported lithium ion cells” and “other significant imported components,” which, if true, would render Lithionics’ Made in USA claims false or unsubstantiated under the Made in USA Labeling Rule.”

Under the proposed order, Lithionics and its owner must stop making these claims unless they can prove their statements are true. As noted above, the company must also pay $100,000 for the alleged activity.

Lions Not Sheep

Lions Not Sheep is a self-proclaimed lifestyle brand that sells sweatshirts, hats, and shirts online.

In its allegations against Lions Not Sheep, the FTC alleged that the company has violated the Made in USA Labeling Rule since May 2021. According to the Complaint, the company intentionally removed tags disclosing that items were made in a foreign country. Instead of leaving the original tags, the FTC alleged that the company replaced them with Made in USA tags despite the products being “wholly imported with limited finishing work performed in the United States.” To make matters worse, the FTC found a video posted on the internet featuring the company’s owner blatantly claiming he could hide the fact that his shirts were made in China.

In addition to charging the company with violating the Made in the USA Labeling Rule, the FTC charged the company with violating mandatory country-of-origin labeling rules, which require all products covered by the Textile Act to include labels disclosing the manufacturer or marketer name and country where the product was manufactured. The company will be prohibited from making these claims and forced to pay $211,335.

Primary Takeaway

With the FTC now levying significant fines under the new Made in USA rule, the potential cost of non-compliance has also significantly increased. Companies should provide notice to their marketing teams and carefully review any existing claims to ensure that Made in USA claims are adequately substantiated and that marketing materials are not conveying unintended implied claims.

Article By Anthony V. Lupo, Dan Jasnow, and Destiny Planter of ArentFox Schiff LLP

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

© 2022 ArentFox Schiff LLP

The Way to Protect Your Business? What You Need to Know About Trade Secrets

What do Coca-Cola’s secret formula, McDonalds’ special sauce, and Google’s search algorithm have in common? Each is a protected trade secret. In other words, they are proprietary information vital to these companies’ survival and are among their most valuable corporate secrets.

A trade secret can be anything of value to your company that is unique and not known to persons outside the company. For example, a trade secret can be a recipe, process, formula, strategy, technique, or device that your competitors do not know, do not have, and cannot use.

Trade secret law can be less risky in some respects than other forms of intellectual property like patents, copyrights, and trademarks. The application process for a patent requires that a company disclose the secret itself. With that comes an inherent risk—should the application be denied, the secret is no longer a secret. While the protection afforded by trade secret law may be considered fragile, meaning constant vigilance is required to maintain secrecy, the secret remains a secret; while a patent, even after issuance, carries some risk of post-grant invalidation. By contrast, a trade secret owner may ultimately enjoy greater certainty by maintaining protection, potentially forever. However, a trade secret is entitled to protection only for as long as it is kept a secret. If the information is lawfully disclosed to the public, it is no longer confidential and loses its trade secret protection forever.

Governing Law: Both federal and state law recognize the time and money invested to gain competitive advantages like trade secrets and protect those advantages. Federal Law: Under the controlling federal legislation passed by Congress in 2016, the Defend Trade Secrets Act (“DTSA”) defines a trade secret as something used in a company’s business that (a) is not known or readily accessible by competitors, (b) has commercial value or that provides a competitive advantage in the marketplace, and (c) the owner of the information protects from disclosure through reasonable efforts to maintain its secrecy. Prior to the DTSA’s enactment in 2016, no federal statute promulgated a federal trade secret private right of action.

In addition to the DTSA’s rules regarding trade secrets, additional federal rules apply. The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending or knowing that the offense will injure a trade secret owner. The Act also makes it a federal crime to receive, buy, or possess trade secret information knowing it to have been stolen. The Act allows the government to punish thefts of trade secrets by imprisonment up to 15 years and/or fines up to $5 million, depending on whether the defendant is an individual or a corporation. A private party can still sue for trade secret theft even if the federal government files a criminal case under the Economic Espionage Act.

New York State Law: Prior to federal law, most states had some form of trade secret law that varied state to state. The Uniform Trade Secrets Act (“UTSA”) was published in 1979 and amended in 1985 to provide a uniform trade secret law. Many states, including Pennsylvania in 2004 and New Jersey in 2012, adopted the UTSA. Notably, New York did not adopt the UTSA and does not have its own state trade secret statute, and thus relies on the common law.

Under New York common law, “misappropriation” refers to the acquisition of a trade secret by someone who knows that the trade secret was acquired by improper means—theft, bribery, misrepresentation, breach, or inducement of a breach of duty to maintain secrecy. The New York statute of limitations requires that any action for misappropriation be filed three years from the date the misappropriation is discovered. Further, New York law requires that the use of the trade secret be continuous in the operation of a business, rather than one-time use.

Cartier v. Tiffany: Cartier recently filed suit against its luxury rival Tiffany & Co. in New York state court. Cartier v. Tiffany & Co., et al.,650925/2022 (N.Y. Sup.). Richemont-owned Cartier sets out claims against LVMH’s Tiffany & Co. for various contractual and tort claims and trade secret misappropriation against both defendants [Who is the other defendant?]. Cartier seeks preliminary and permanent injunctive relief to require defendants to refrain from using the allegedly misappropriated information and return it to Cartier, as well as a judgment for any “compensatory damages that may be caused by [Tiffany’s] wrongful conduct.”

The complaint states that Tiffany & Co. lured former Cartier employee Megan Marino away from her role as its Assistant Manager for Jewelry Merchandising to learn more about Cartier’s “High Jewelry” collection, where pieces typically cost $50,000 to $10 million.

Cartier claims Marino was bound by non-disclosure and non-solicitation agreements she had signed as part of her role at Cartier and that she breached those agreements by using Cartier’s confidential business information to benefit Tiffany. This information includes Cartier’s “very sensitive and valuable” internal company documents that Marino forwarded to her personal email. Specifically, Marino “referenced a [Cartier] Excel spreadsheet” that “detailed Cartier’s confidential, High Jewelry assortment information.” Based on that spreadsheet, Cartier alleges, Marino “created a new Excel document, derived entirely from Cartier’s confidential information,” including “the total number of High Jewelry pieces at various Cartier locations in the U.S.” Cartier maintains this information is “only accessible by a limited number of Cartier employees [and] not known outside of Cartier” and “allow[s] a sophisticated competitor to replicate key strategies and, with relative ease, to reverse engineer how Cartier allocates, merchandises, and prices its High Jewelry stock.” Cartier claims the proprietary and confidential nature of this information amounts to a trade secret-protected asset.

Cartier further claims Tiffany has a history of poaching employees and maintains a “disturbing culture of misappropriating competitive information.” Given the alleged pattern, Cartier asserts that Tiffany now possesses “a substantial amount of [its] confidential and trade secret information that it obtained from Marino and other former Cartier employees” as a result of their “unlawful taking of Cartier’s valuable confidential information and trade secrets.”

Even if Cartier successfully establishes that it maintains trade secret information that Tiffany misappropriated, the case is hardly straightforward. Establishing damages in cases like this is particularly challenging, as it is difficult to assign a dollar value to trade secret information that will compensate the plaintiff for the economic loss caused by the defendant’s misappropriation. As a result, courts generally have quite a bit of discretion in fashioning damages awards.

Article By David H. Siegel of Norris McLaughlin P.A.

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

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

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.

Health Care Providers on Alert: Two Hospitals Penalized for Continuous Noncompliance with the Hospital Price Transparency Rule

We previously discussed the requirements of the Hospital Price Transparency Rule (“Rule”) on health care providers and health plans, as well as CMS’s proposal to increase penalties for a hospital’s failure to comply with the Rule.  About a year and a half after the Rule became effective, CMS has now imposed its first set of civil monetary penalties (“CMPs”) on Northside Hospital Atlanta and Northside Hospital Cherokee, which have been fined $883,180 and $214,320, respectively.

The Rule requires, in part, hospitals to make public a machine-readable file containing a list of all standard charges for all items and services, such as, e.g., supplies, room and board, and use of the facility, among other items.  See 45 C.F.R. § 180.40(a); id. at § 180.20.  The Rule also requires hospitals to display shoppable services in a consumer-friendly manner.  See id. at § 180.60(d)(2); id. at § 180.60(b).  The goal of these specific requirements, in addition to those set forth in the remainder of the Rule, is to provide consumers with sufficient information about the charges for certain items and services by requiring health care providers and health plans to be publicly transparent about such charges.

Based on CMS’s CMP letters, dated June 7, 2022, Northside Hospital Atlanta and Northside Hospital Cherokee were non-compliant with the aforementioned specific requirements of the Rule.  The chronology of events is important to understand how CMS ended up issuing its CMP letters.

Northside Hospital Atlanta

For Northside Hospital Atlanta:

  • CMS documented the hospital’s non-compliance since March 24, 2021.
  • CMS issued a Warning Letter, dated April 19, 2021, to the hospital and provided it the opportunity to respond and to provide supporting documentation to CMS.
  • Northside Hospital Atlanta did not respond.
  • On September 2, 2021, CMS reviewed the hospital’s website and determined that the non-compliance persisted.
  • On September 30, 2021, CMS issued a Request for Corrective Action Plan (CAP) to the hospital, stating that it was non-compliant with the aforementioned specific requirements of the Rule.
  • On November 15, 2021, in response to the Request for CAP, the hospital stated that patients could request specific price estimate quotes by calling or emailing Northside Hospital Atlanta, which CMS determined was insufficient in response to its Request for CAP and to comply with the Rule.
  • On December 20, 2021, CMS requested a revised CAP from the hospital.
  • Northside Hospital Atlanta did not respond.
  • On January 11, 2022, CMS conducted a technical assistance call with the hospital, during which the hospital confirmed that it was non-compliant with the Rule and explained that it had intentionally removed all previously posted pricing files.
  • On January 24, 2022, CMS, again, requested a revised CAP from the hospital.
  • Northside Hospital Atlanta did not respond.

Based on the foregoing, CMS imposed an $883,180 CMP on Northside Hospital Atlanta, calculated as follows, pursuant to 45 C.F.R. § 180.90:

  • $36,300
    • $300 per day of non-compliance times 121 days.
    • 121 days represents the number of calendar days during 2021 that Northside Hospital Atlanta was non-compliant with the Rule (September 2, 2021 through December 31, 2021), pursuant to 45 C.F.R. § 180.90(2)(i).

 plus

  • $846,880
    • $10 per bed per day times 536 beds times 158 days.
    • 158 days represents the number of calendar days during 2022 that Northside Hospital Atlanta was non-compliant with the Rule (January 1, 2022 through the date of CMS’s CMP letter, June 7, 2022), pursuant to 45 C.F.R. § 180.90(2)(ii).

Northside Hospital Atlanta has until 60 calendar days from the date of CMS’s CMP letter to pay.  Until the hospital notifies CMS that all non-compliance has been corrected, CMPs will continue to accrue.

Northside Hospital Cherokee

For similar reasons as Northside Hospital Atlanta, Northside Hospital Cherokee was fined $214,320.  CMS noted that Northside Hospital Cherokee was non-compliant since April 16, 2021, and notified the hospital by Warning Letter, dated May 18, 2021.  CMS reviewed the hospital’s website on September 9, 2021, and issued a Request for CAP on October 27, 2021—to which the hospital did not respond.  Similar to Northside Hospital Atlanta, CMS held a technical assistance call on January 11, 2022, during which Northside Hospital Cherokee notified CMS that it had intentionally removed all previously posted pricing files.  CMS requested a Request for CAP on January 24, 2022—to which the hospital did not respond.

Similar to Northside Hospital Atlanta, Northside Hospital Cherokee was penalized $214,320, calculated as follows:

  • $34,200
    • $300 per day of non-compliance times 114 days.
    • 114 days represents the number of calendar days during 2021 that Northside Hospital Cherokee was non-compliant with the Rule (September 9, 2021 through December 31, 2021), pursuant to 45 C.F.R. § 180.90(2)(i).

plus

  • $180,120
    • $10 per bed per day times 114 beds times 158 days.
    • 158 days represents the number of calendar days during 2022 that Northside Hospital Cherokee was non-compliant with the Rule (January 1, 2022 through the date of CMS’s CMP letter, June 7, 2022), pursuant to 45 C.F.R. § 180.90(2)(ii).

Similar to Northside Hospital Atlanta, CMS noted that Northside Hospital Cherokee continues to be non-compliant and, thus, CMPs will continue to accrue.

Takeaways

These fines reflect CMS’s willingness to take material enforcement action where the Rule’s regulatory requirements are largely ignored and CMS’s subsequent efforts to obtain compliance are rejected.  Non-compliance carries heavy fines that are calculated, in part, by the number of days of non-compliance and by bed count.  Health care providers should take notice and ensure that they are compliant or, at least, making efforts towards compliance with the Rule’s requirements.  Critically, CMS will not accept a refusal to comply, as reflected in CMS’s responses to Northside Hospital Atlanta’s and Northside Hospital Cherokee’s refusals to submit CAPs.  As noted in CMS’s CMP letters to these providers, CMS is scanning websites and subsequently notifying providers that appear to be non-compliant with the Rule—which are ignored at the provider’s peril.

Article By Edward S. Kornreich and Matthew J. Westbrook of Proskauer Rose LLP

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

© 2022 Proskauer Rose 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

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

Intellectual Property: Understand It to Protect What You Own, Drive Value to Your Business and Positively Impact Your Bottom Line

Intellectual Property (or “IP”) is commonly defined as a group of legal rights that provide protection over things people and businesses create or invent. It might sound straightforward, but there is a lot of confusion over what can actually be protected and what cannot.

Who needs to be concerned with IP Protection?

We’ve all heard the phrase, “hindsight is 20/20”. That’s especially true when it comes to IP protection. So often people and businesses do not realize a new creation or innovation should be protected until it is too late. If you are creating or developing within your space, you need to have an IP strategy to avoid any unintentional disclosure missteps. And, when you are creating, be careful to:

  • Make records. They should be accurate, dated, and corroborated.
  • Research the competitive landscape early and identify both opportunities for protection and risks of infringement.
  • Use a non-disclosure agreement or contract before collaborating with another business or other people, such as consultants.

What are some of the biggest IP challenges business owners and employers need to overcome?

The goal for your IP strategy needs to be: Identify, Protect, Monetize.  The question business owners need to answer is how they can most effectively achieve this. The first step is understanding the applicable types of IP that are protectible and the steps needed to secure protection  of each.

Intellectual Property Type The Value

Trade Secret

 No registration fees or costs. Goes into effect upon creation and can last forever. Protection available at the state and federal levels.

Non-Disclosure Agreement/Contract (or “NDA”)

 Very affordable and flexible but, it only binds the contracting parties. An NDA should be used with your employees and other businesses you deal with concerning sensitive business information.

 

Copyright

 

 Free and automatic upon creation, register for significant added value. Protection available only at the federal level and registration is required to enforce protection.

Trademark/Service

 Commercial differentiation, quality identifier and price enhancement. Low cost and can last forever but must police others’ misuse.

How can an IP strategy affect your bottom line?

It’s important to understand there is no “one-size fits all” approach to IP. The correct IP strategy must be tailored to your unique business. While some businesses may be overspending on a scattered approach to protecting IP, other businesses may not be investing enough and potential losing out on what could have been an important revenue stream.

© 2022 Davis|Kuelthau, s.c. All Rights Reserved
For more articles about IP Law, visit the NLR Intellectual Property section.

Full Ninth Circuit Removes Unwarranted Hurdles to Class Certification in Big Tuna Antitrust Case

Court delivers a necessary course correction in the law of class certification.

There was reason for optimism in August 2021, when the Ninth Circuit Court of Appeals granted rehearing en banc of a 2-1 decision that would have made it more difficult for antitrust claimants to secure class certification. The three-judge panel in Olean Wholesale Grocery Coop., Inc. v. Bumble Bee Foods LLC, 993 F.3d 774 (9th Cir. 2021) had determined that Federal Rule of Civil Procedure 23(b)(3) required a district court to find that no more than a de minimis number of class members are uninjured before a class may be certified. Having announced this de minimis rule in its opinion, the court then took the unusual step of inviting the parties to argue whether the full court should rehear the issue en banc.

As we wrote last year when en banc rehearing was granted, with its de minimis rule, “the panel really jumped the median strip.” We argued that the rule conflated the question of whether issues common to the class predominate over issues unique to individual class members with the question of how the class is defined and that the Ninth Circuit’s new and unrealistic de minimis requirement erected an unnecessary procedural hurdle to class certification. Other commentators and amici argued that requiring proof that all but a de minimis number of class members are injured requires a determination on the merits, impermissible at the class certification stage.

In welcome news for claimants and attorneys who bring antitrust class actions, the Ninth Circuit sitting en banc decided against the de minimis rule, for all of the foregoing reasons, in Olean Wholesale Grocery Coop., Inc. v. Bumble Bee Foods LLC, No. 19-56514, 2022 U.S. App. LEXIS 9455 (9th Cir. Apr. 8, 2022).

In a thorough review of the requirements for class certification under Rule 23, the Ninth Circuit held that the movant’s burden is to prove the prerequisites of Rule 23 by a preponderance of the evidence, bringing the Ninth Circuit in line with the law in the First, Second, Third, Fifth, and Seventh Circuits. As for the predominance requirement of a Rule 23(b)(3) class, the court cited In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 311 (3d Cir. 2008) as amended (Jan. 16, 2009), to hold that, when assessing whether a plaintiff has proven that a common question related to a central issue in the claim predominates, a district court is limited to resolving whether the evidence establishes that a common question is capable of class-wide resolution, not whether the evidence in fact establishes that plaintiffs would win at trial.”

In rejecting the de minimis rule, the court began with the notion that class-wide proof is not required for all issues. Thus, the need for individualized assessment of a class member’s damages does not preclude a court from certifying a class. It contradicts this notion to require proof of injury of not more than a de minimis number of class members.

The presence of uninjured class members, the court held, does not defeat predominance. Predominance is defeated only where the class members cannot rely on the same body of common evidence to establish the common issue.

The presence of a large number of uninjured class members, however, could require a district court to consider whether the class definition is “fatally overbroad.” The remedy in that case, the court said, is to “redefine the overbroad class to include only those members who can rely on the same body of common evidence to establish the common issue.” “[T]he problem of a potentially ‘over-inclusive’ class,” the court said, “can and often should be solved by refining the class definition rather than by flatly denying class certification on that basis” (citation and internal quotation omitted).

With that, the Ninth Circuit reversed the three-judge panel and affirmed the certification of the classes by U.S. District Judge Janis L. Sammartino of California’s Southern District*, holding that the district court did not abuse its discretion in concluding that the methodology employed—statistical regression analysis and other expert evidence—”was capable of showing that a price-fixing conspiracy caused class-wide antitrust impact.”  [*Judge Sammartino subsequently recused herself and the case was reassigned to Chief Judge Dana Sabraw.]

The 9-2 decision was written by Circuit Judge Sandra S. Ikuta. In a dissenting opinion, Circuit Judge Kenneth K. Lee said as much as a third of the class members were unharmed. This is a “victory to plaintiffs” who will now be able to settle the action without having to prove their case trial, he said.

The suit was brought by direct purchasers of tuna products, indirect purchasers of bulk-sized tuna products, and individual end purchasers against the owners of Bumble Bee Foods LLC (currently in Chapter 11), StarKist Co., and Chicken of the Sea—which sell more than 80 percent of the packaged tuna in the United States. The industry has also been investigated by the Department of Justice in recent years, resulting in criminal guilty pleas by industry executives for participating in a price-fixing conspiracy.

Nothing in Rule 23 suggests that the presence of more than a de minimis number of uninjured class members affects whether questions affecting only individual class members predominate.

The now vacated de minimis rule conflates impact with damages and the predominance inquiry with potential overbreadth in the class definition. The Ninth Circuit’s en banc decision is a model of clear thinking and a welcome course correction in the law of class certification.

Article By Dan Mogin and Jonathan Rubin of MoginRubin

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

© MoginRubin LLP

Vehicle Sales Continue Their Depression

Anyone want to buy a vehicle? A better question might be: anyone got a vehicle for sale? Whether because of supply side issues, demand side issues, other issues, or all of the above, the fact remains that the first quarter of 2022 was not a good quarter for vehicle sales.  Just ask the manufactures who saw double digit drops in new light-vehicle sales: 23% for Honda; 20% for GM; 17% for Ford; 15% for Toyota; and 14% for Stellantis. While the numbers sound like doom and gloom, the manufacturers were not dour. Honda was quite positive about its numbers, noting that demand was strong and they just could not make enough vehicles to sell more, “we’re riding a bit of a roller coaster due to fluctuating parts supply issues, but strong March sales for Honda and Acura speak to the fact that demand remains strong and our retail deliveries are based primarily on what we can supply to our dealers.”

Some other interesting tidbits from sales data:

As a result, LMC Automotive and Cox Automotive each reduced their full-year U.S. light-vehicle sales forecast to 15.3 million units, citing a slower pace to recovery from market constraints. LMC referred to inventory levels as “critically low.”  Cox led its report by noting that not only are inventories low, but prices are high and sales incentives have vanished (note – this is how that entire supply/demand thing works).  Cox laid it all at the feet of supply: “Auto sales will basically be stuck at the current level until more supply arrives.”

Globally, the pandemic is not over. This continues to have the potential to drastically impact global vehicle volumes, especially in China. Global vehicle production could lose up to 1.5 million units this year if China’s COVID-Zero policy is maintained, according to estimates from Fitch Solutions quoted in Bloomberg. Most recently, phased lockdowns in Shanghai in response to COVID-19 outbreaks disrupted production for several major automakers and suppliers.

Add to that, the ongoing microchip shortage (for which no end appears in sight) is causing production downtime at various plants: Jeep production at Stellantis’ Mack Assembly plant in Detroit and Belvidere Assembly plant in Illinois; Chevrolet Silverado 1500 and GMC Sierra 1500 production at GM’s Fort Wayne Assembly plant; and Mustang production at Ford’s Flat Rock Assembly plant. Let’s not forget the war in Ukraine, leading to German automakers potentially losing up to 150,000 units of production in March due to supply disruptions.

Oddly, the industry feels both healthy (revenue, profits, margins, etc.) and stressed with an unceratin future (see above) all at the same time.  Also oddly, but strangely not so oddly, nothing about this situation feels new.  Is this the new normal?

Article By Jeffrey A. Soble of Foley & Lardner LLP

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

© 2022 Foley & Lardner LLP