Category: Uncategorized

OSHA was scheduled to begin enforcing its new beryllium rule for General Industry March 12, 2018.  That enforcement date has been delayed 60 days.  In a March 2, 2018, memorandum from Tom Galassi to OSHA’s regional administrators, Galassi instructed, “[n]o provisions of the beryllium final rule may be enforced until May 11, 2018.”

Galassi explained the reason for the delay:

OSHA has been in extensive settlement discussions with several parties who have filed legal actions challenging the general industry standard. In order to provide additional time to conclude those negotiations, we have decided to delay enforcement of the general industry standard by 60 days until May 11, 2018. Furthermore, to ensure employers have adequate notice before OSHA begins enforcing them, as well as in the interest of uniform enforcement and clarity for employers, we have decided to also delay enforcement of the PEL and STEL in the construction and shipyard standards until May 11, 2018. No other parts of the construction and shipyard beryllium standards will be enforced without additional notice. In the interim, if an employer fails to meet the new PEL or STEL, OSHA will inform the employer of the exposure levels and offer assistance to assure understanding and compliance.

This article was written by Daniel R. Flynn of Dinsmore & Shohl LLP

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A corporation ordinarily is not liable for the debts of other entities or for the debts of its owners in the absence of an express agreement, such as a guarantee. However, a creditor of one company may try to impose liability on one or more non-debtor entities under “alter ego” or “successor liability” theories in certain circumstances.  In these circumstances, a creditor often alleges that there has been a transaction between a predecessor debtor entity and successor non-debtor entity through which: (1) the successor expressly or impliedly has assumed the liabilities of the predecessor; (2) the transaction has resulted in a de facto merger between the entities; (3) the successor is a mere continuation of the predecessor; or (4) the transaction is a fraudulent effort to avoid liabilities of the predecessor.  If the creditor is successful, a non-debtor entity may then become liable for debts that it did not incur in its own name and that non-debtor entity’s assets also may be reachable to satisfy the debts.

In Longo v. Associated Limousine Services, Inc., a District Court of Appeal of Florida recently addressed a creditor’s attempt to hold certain non-debtor entities and individuals liable for payment of a debt owed to the creditor.  Creditor, Frederick Longo, had obtained a judgment of more than $620,000 against debtor, Associated Limousine Services, Inc.  When Associated Limousine did not pay the judgment, Longo sought to implead (bring into the case) Robert Boroday, as sole officer of Associated Limousine, three other members of the Boroday family, and eight business entities connected to the Boroday family (collectively, the “impleader defendants”).

Longo alleged that the impleader defendants “were operating a business that was a continuation of the judgment debtor’s business” and that the eight business entities were “alter egos” of American Limousine. In support of this claim, Longo alleged that the impleader defendants:

• Conspired to organize and operate alternate business entities that would acquire the accounts and clients of the judgment debtor, while avoiding creditors;
• Comingled assets with each other and the judgment debtor;
• Acted and operated as a single business entity;
• Used fictitious names that were similar to and substantially the same as the judgment debtor; and
• Profited from the judgment debtor’s business, procured the judgment debtor’s clients for their own benefit, and attempted to conceal the transactions to prevent existing creditors from collecting from the judgment debtor.

The trial court denied Longo’s request to bring the impleader defendants into the case on the basis that Longo failed to file an affidavit describing the property of the judgment debtor that allegedly was in the hands of the impleader defendants, as required by an applicable Florida statute. On appeal, the District Court of Appeal reversed that decision and remanded the matter to the trial court. The Court of Appeal’s order provided that, on remand, Longo would be allowed to submit an affidavit describing any property of any impleader defendant that allegedly should be available to satisfy the judgment under an alter ego theory.

In support of its decision, the Appeals Court stated “[t]he concept of alter ego or continuation of business ‘arises where the successor corporation is merely a continuation or reincarnation of the predecessor corporation under a different name.’” The Court further noted that a third party’s liability is “premised on the notion that the judgment debtor and third party should be treated as the same entity.” The Court left it to the trial court on remand to determine, on a more fully developed record, whether sufficient grounds for successor liability existed in this case, so as to subject the impleader defendants’ assets to further collection efforts.

Outcomes of successor liability claims will vary from state to state, depending on how the law in each state has developed.

However, common factors that courts typically consider in evaluating potential successor liability include: continuity of directors, officers, stockholders, personnel, physical location, assets, and general business operations between the predecessor and successor corporations; whether the predecessor corporation has been dissolved; the continued existence of only one corporation after the transfer of assets; and the assumption by the successor corporation of those obligations necessary for the continuation of normal business operations of the predecessor corporation.

In the context of family-owned businesses that may have multiple operating entities, steps should be taken to maintain both the appearance and the reality of separateness. To the extent one entity intends to acquire the assets of another entity, the parties also should document the transaction appropriately to identify the consideration provided for any assets and should be able to justify any continuity of business operations, ownership and management between the entities. It may be impossible to avoid all claims of successor liability by creditors. But having clear separation between entities and documentation of the value conferred and received in any transfers of assets to a successor corporation may be instrumental in the defense of such claims.

This article was written by Michael P. Connolly of Murtha Cullina

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On March 6, 2018, the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) announced a new nationwide program to resolve minimum wage and overtime violations under the Fair Labor Standards Act (FLSA). Referred to as the Payroll Audit Independent Determination (PAID) program, it is expected to be a six-month pilot initiative that allows employers to conduct self-audits of their payroll practices and voluntarily report underpayments to the DOL/WHD which, in turn, will supervise the back wage payments. A press release touting this pilot program said, “[t]he PAID program facilitates resolution of potential violations, without litigation, and ensures employees promptly receive the wages they are owed.” More information on the program, including a program overview and details on how the program will work is available on the WHD website.

Through this initiative, the DOL/WHD is once again exercising its authority in the FLSA to supervise back wage settlements in cases where employers voluntarily disclose minimum wage or overtime violations and submit to the agency’s authority in cases that meet certain minimum criteria for participation. In order to participate in PAID, an employer first must identify the violations, the impacted employees, and the time periods of the violations. The employer must also compute the back wages due each impacted employee. Then the employer can request to participate in the program and have the DOL/WHD supervise the payment of the back wages due. The FLSA expressly authorizes the Secretary of Labor to supervise the payment of unpaid minimum wages on unpaid overtime compensation due employees under sections 6 or 7 of the FLSA, respectively, in addition to providing for a private right of action to remedy FLSA violations. The statue further provides that the acceptance by any employee of this DOL/WHD supervised settlement amount acts as a waiver by that employee of his or her right to file an action to recover any alleged unpaid wages, liquidated damages, and attorneys’ fees.

In announcing the PAID pilot program, the DOL/WHD states that not all violations that employers discover and for which they voluntarily request DOL/WHD supervision are eligible for this program. A key qualification is that the relevant FLSA violation cannot be at issue in litigation or in arbitration between the employer and employee group or under investigation by the DOL/WHD.

This is a positive development for both employees and employers, as well as the DOL/WHD.  Settlement supervision is an efficient way the US DOL/WHD to achieve employer compliance with the FLSA because it will occur when an employer discovers a violation, commits to taking action to correct the violation going forward, and approaches the DOL/WHD to supervise the payment of back wages. All this can occur without having to wait for the DOL/WHD to investigate the employer. The supervision of settlements is a speedier process for employees and former employees to receive the back wages that they are due so they are made whole much more quickly. It is especially faster than more expensive private litigation, which can take years to resolve. Finally, an employee can refuse a back wages payment and retain his or her private right of action under the FLSA.

Secretary Acosta and his team at the DOL should be commended for reinstituting this initiative to supervise settlements of selected minimum wage and overtime violations that employers voluntarily disclose. This beneficial practice was ended during the last administration. Hopefully, the DOL/WHD’s experiences during this pilot program will convince the agency of the merits of the program so that it will become a standard operating procedure during the remainder of this administration.

This article was written by Alfred B. Robinson, Jr. of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

Unpacking the Critical Article 28

On May 25, 2018 the EU will have the right to fine and regulate foreign “processors” of EU subject data, including hundreds of U.S. companies. This article will address ways to protect your organization financially and remain compliant.  

Get ready: The EU’s General Data Protection Regulation (GDPR) is set to take effect in under four months (May 25, 2018 to be exact). Under the new law, the EU can directly fine and regulate foreign “processors” of EU subject data. Making matters more complicated, the GDPR’s definition of “processor” is very broad and includes most U.S. companies that receive data, from any source, that personally identifies European Union subjects.

Generally speaking, a “processor” is an entity that collects, records, organizes, structures, stores, uses, transmits or even erases or destroys personal data at the request of a data “controller.” The controller is the original “owner” or “receiver” of the personal data and essentially acts as the boss, instructing the processor on what the processor should do with the data. Analogizing this to U.S. law, the controller is the principal, and the processor is the agent; or, for those acquainted with HIPAA, the controller acts much like the “covered entity” (in that the controller is responsible for the data in the first instance), and the processor acts much like the “business associate,” performing discrete functions with the data pursuant to contract.

The extraterritorial application of the GDPR, and the potential for fines in excess of €20 million in some instances, have made GDPR compliance one of the top concerns for privacy and data security counsel around the globe. Unlike prior iterations of EU privacy law, this law reaches U.S. companies directly.

The law is structured in Articles, which comprise actual operative language of the Regulation. The Articles are preceded by Recitals, which, while not having the force of law, assist the reader in understanding the context and goals of the Articles. Think of Recitals as a form of well-organized legislative history; it’s not law by itself, but it helps us to understand and interpret the law.

While a number of Articles apply to U.S.-based data processors, one of the most important is Article 28, entitled “processor,” which is devoted entirely to regulation of processing activities. Article 28 sets out the key responsibilities of the processor and identifies core, nonnegotiable terms that must be included in any agreement between a controller and a processor. Understanding this Article is vital because the first introduction most U.S.-based companies will have to the GDPR will be in the form of a contract from an EU entity (or addenda to an existing contract) sent pursuant to Article 28.

Below is a summary of Article 28 sections critical to GDPR compliance, a few suggestions as to actions that can be taken to prepare for compliance and a summary of why it matters:

Section 1

This section requires controllers to select only those processors that can provide sufficient guarantees that the processor will comply with the GDPR and implement “appropriate technical and organisational measures” to protect the data.

Suggestions: Prepare for GDPR now by reviewing the obligations imposed on processors and instituting technical measures (see e.g., Article 32 (security of processing)) and policies so that your organization is positioned to provide the required guarantees).

Why It Matters: Controllers are legally obligated to select processors that are prepared for the GDPR. This confers a competitive advantage on those U.S. firms that have attacked this issue proactively.

Section 2

This section requires written approval by the controller of any subprocessors used by the processor. One example of a subprocessor would be a vendor that does billing using EU-subject personal information. The actions below will allow processors to achieve “downstream” compliance by providing notice to the Processors’ vendors of their obligation to comply with the GDPR.

Suggestions:

• Inventory current subprocessor vendors. Discuss forthcoming GDPR requirements with these vendors — they may not have the same direct EU customers as your organization.
• Negotiate language in processing agreements whereby the controller approves a list of subprocessors utilized by the processor.
• Consider developing a form subprocessor agreement that may be easily modified to fit particular use cases.

Why It Matters: Remember, since subprocessors may not have a contract with a controller, it is the processor’s obligation to ensure GDPR compliance by subprocessors.

Section 3

This section requires a written contract between the controller and the processor and sets out a number of required terms for such agreements. These terms include, for example, a stipulation that the processor will only act on the instructions of the controller, that employees and contractors employed by the processor will “commit themselves to confidentiality” and that the processor will assist the controller in ensuring compliance with certain other Articles of the GDPR, among other things.

Suggestions: Review these required terms in detail with counsel and ensure that systems are in place to meet the obligations imposed. These terms will be considered nonnegotiable by the controller.

Why It Matters: These terms will be found in every processor agreement, and certain of the terms will require the processor to install policies or technical or organization measures to achieve compliance. Since these terms are essentially universal and nonnegotiable, processors should prepare for compliance now.

Section 4

This section essentially requires the processor to ensure that all subprocessors are subject to the same “data protection obligations” as the processor.  It also states explicitly that the original processor remains fully liable to the controller “for the performance of that other processor’s obligations.”

Suggestions:

• Closely evaluate and audit subprocessors for their ability to comply with the GDPR and the requirements set forth in the original agreement between the controller and the processor.
• Consider indemnification and other contractual provisions to mitigate liability in the event of subprocessor noncompliance since the GDPR likely prohibits shifting of liability from the processor to the subprocessor in certain respects.

Why It Matters: As noted above, processors are, generally speaking, responsible for their subprocessors’ errors.  Thus, audits and other contractual protections should be strongly considered to minimize risk.

Section 5

This section allows controllers to rely on approved codes of conduct and certification mechanisms to establish GDPR compliance by processors. This is similar to the current market’s willingness to rely on SOC-2 audit letters or ISO27001 accreditations, except such reliance is specifically authorized by law.

Suggestions:

• This section likely will operate as a diligence shortcut for controllers in the sense that adherence to such pre-approved accreditations will automatically qualify the processor as a trusted vendor.
• Consequently, qualification/certification by a processor under such a standard will be viewed as a serious advantage worth pursuing by some U.S. firms.

Why It Matters: Getting qualified or certified as a trusted data processor will allow U.S.-based entities to market themselves as GDPR-ready to European customers.

Conclusion

Compliance with the GDPR clearly will evolve after it takes effect as regulators begin scrutinizing relationships and data subjects begin exercising rights. American data processors will need to be agile in the face of changing requirements and interpretations, but this does not alleviate the need or lessen the value of basic preparation now.  Preparation such as that outlined above, while challenging, potentially gives U.S.-based processors a decisive competitive advantage in Europe over noncompliant peers.

This article was written by Christian M. Auty of Much Shelist, P.C.

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Try searching for “Supreme Court narrows” and you will find numerous law firm memos and articles with the following headline (or something very close to it):

“Supreme Court Narrows Definition Of Whistleblower”

These memos and articles all discuss the same U.S. Supreme Court decision,  Digital Realty Trust, Inc. v. Somers, 2018 U.S. LEXIS 1377, and they all make the claim that the Supreme Court has narrowed the definition of “whistleblower” under the Dodd-Frank Act.

The problem is that the Supreme Court did no such thing.  Yes, it is true that the Supreme Court held that under the anti-retaliation provision of the Dodd-Frank Act a person must report to the SEC to fall within the definition of “whistleblower”.  It is not true that the Supreme Court thereby narrowed the definition of “whistleblower”.  Congress enacted a narrow definition of whistleblower:

“any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”

15 U.S.C. § 78u–6(a)(6).  The Supreme Court merely read and applied the statute as written.

This is no small point.  When lawyers and others describe the Supreme Court as doing more than simply interpreting and applying laws, they blur the lines between the legislative and judicial.  Not even the Supreme Court has the power under our Constitution to make up the rules as it goes along.  With headlines like these, we soon won’t be able to tell the difference between Haman from Mordecai (see Babylonian Talmud, Megillah 7b)!

This article was written by Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP

The Patent Trial and Appeal Board (PTAB) affirmed an examiner’s rejection under 35 USC § 101 of claims directed to “managing customer discounts following the receiving of a cancellation request by a customer,” finding that the rejection was appropriate even though the examiner did not provide factual evidence to support his finding that the claims were directed to an abstract idea. Ex ParteBradley Johnson et al., Appeal No. 2016-004623 (PTAB, Jan. 18, 2018) (Medlock, APJ).

The application at issue relates to a system and method for customer discount management. The US Patent and Trademark Office (PTO) examiner found the pending claims directed to “a fundamental economic practice and, therefore, to an abstract idea.” The claims were therefore rejected under § 101. Applicants appealed.

The PTAB, after explaining that there was “no controlling authority that requires the Office to provide factual evidence to support a finding that a claim is directed to an abstract idea,” dismissed applicants’ argument that the rejection could not be sustained because the examiner did not present evidence supporting his conclusion that the claims were directed to an abstract idea.

The PTAB further explained that the US Court of Appeals for the Federal Circuit has “repeatedly” noted that “the prima facie case is merely a procedural device that enables an appropriate shift of the burden of production,” refuting the appellants’ suggestion that the PTAB had previously held that such requirement existed. The PTAB further concluded that all that is required of the examiner is to sufficiently articulate the reasons for rejection in an informative manner that satisfies the notice requirements of 35 USC § 132.

Practice Note: Practitioners should note the possible impact of this decision on the examiner guidance issued by the PTO in 2016 regarding how to formulate a subject matter eligibility rejection (IP Update, Vol. 19, No. 5). The guidance requires office actions to provide an explanation as to why each patent claim is unpatentable.

This article was written by Rolando Gonzalez of McDermott Will & Emery

The Internal Revenue Service (IRS) publishes a monthly update to the applicable federal rates (AFRs) and 7520 rates.

Planning professionals and their clients should take note of fluctuations in these rates and be mindful of planning opportunities that come with rate changes.

The AFR is calculated by the IRS under Section 1274(d) of the Internal Revenue Code (Code) and is used for many purposes. One of its most common applications is to establish the minimum interest rate that can be charged on an intra-family loan without income or gift tax consequences. These “safe harbor rates” are dependent upon two factors: (i) the term of the loan and (ii) the frequency of compounding of interest.

For these purposes:

• Demand notes and notes with a term of three years or less are considered short-term obligations;
• Notes with a term of more than three years but less than nine years are considered mid-term obligations; and
• Notes with a term of more than nine years are considered long-term obligations.

The AFR rates for March 2018 and the preceding six months are as follows:

The 7520 rates are used to calculate the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. They are calculated by the IRS under Code Section 7520 (hence, the name “7520 rates”) and are always 120 percent of the AFR for mid-term obligations with semi-annual compounding.

The 7520 rates for March 2018 and the preceding six months are as follows:

Rates are typically published by the 20^th day of each month and provide planning opportunities for certain estate planning vehicles which are interest rate sensitive. For example:

• Lower rates are generally preferable for intra-family loans, grantor retained annuity trusts (GRATs), installment sales to grantor trusts, and charitable lead annuity trusts (CLATs).
• Higher rates are generally preferable for qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs).

As rates continue to change, advisors and clients should maintain an open dialogue so that clients can take advantage of any planning opportunities tied to increasing or decreasing rates.

This article was written by Carmela T. Montesano of Greenberg Traurig, LLP

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Your company, an engineering firm, is hired by an agent for coal-fired plants to serve as contractor on projects to build jet bubbling reactors, which eliminate contaminants from the plants’ exhaust.  Your company, in turn, subcontracts the engineering and construction of the reactors’ internal components to another firm.  After the contractor’s work is done, the plants discover that the components are defective, causing the reactors to deform, crack or even collapse.   The agent notifies your company of the problem and asserts that it is liable for the costs of repairing and replacing the defective components, an amount which will run well into the hundreds of millions of dollars.

Your company tenders the claim under its commercial general liability (“CGL”) policy, which says that it covers amounts your company is legally obligated to pay as damages for property damage caused by an “occurrence.”   The policy defines “occurrence” to mean an “accident.”  Clearly, the defective workmanship was not intentional.  While the policy excludes coverage for property damage to your company’s completed work that arises out of that work, that exclusion does not apply when the work at issue was performed on your company’s behalf by a subcontractor.

Because the property damage here arose out of the subcontractor’s work, coverage seems fairly straightforward, but the insurance company flatly denies the claim.  It contends that defective workmanship by your subcontractor is not an “accident” or “occurrence” within the meaning of the policy, even if the property damage was not intentionally caused.

Surprisingly, not that long ago, many courts would have sided with the insurance company in denying coverage.  CGL policies are generally issued on standardized forms.  This standardization over time has resulted in a fairly robust – though often inconsistent – body of law interpreting the intricacies of their various provisions.  Even though the standard CGL definition of “occurrence” says nothing about workmanship, a number of courts looked beyond the text of the policy to reason that, as a general principle, CGL policies simply were never intended to function as a “security bond” for defective workmanship.  In recent years, that interpretation of CGL policies – always controversial – has fallen sharply out of favor.

In Black & Veatch Corp. v. Aspen Ins. (UK) Ltd., a case recently decided by the Tenth Circuit Court of Appeals, the court looked at the above facts and concluded that New York courts – long an adherent to a narrow interpretation of CGL coverage – would find that the property damage arising from the subcontractor’s work was a covered “occurrence” under the policy.

Black & Veatch (B&V), the policyholder, entered into a settlement obligating it to pay more than $225 million for the costs of repairing the reactors due to defective workmanship by B&V’s subcontractor, Midwest Towers, Inc.  When Aspen, an excess insurer, denied the claim, B&V sued the carrier in federal court in Kansas.  On cross motions for summary judgment, the court found that, under applicable New York law, there could be no “occurrence” triggering coverage under the Aspen CGL policy unless the damage occurred to something other than B&V’s own work product (which, under the policy, includes work performed by B&V or by subcontractors on its behalf).  B&V appealed to the Tenth Circuit.

The Tenth Circuit started its analysis with the policy’s insuring agreement, which encompasses liability for property damage arising out of an “occurrence,” defined as an “accident.”  It noted that New York authorities have held that “accident” means “unexpected and unintentional.”  Although an insured may foresee that its subcontractor may construct something deficiently, the court said that “does not render the resulting damages intentional” or “expected.”   In short, the court found nothing in the insuring agreement that excluded defective workmanship.

The court then turned to the policy’s “your work” exclusion, which excludes coverage for the property damage to the insured’s own completed work that arises out of the work.  In particular, the court focused on an exception to that exclusion, commonly referred to in the insurance world as the “subcontractor exception” to the “your work” exclusion.  That is, the exclusion does not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

Aspen argued that the subcontractor exception cannot create coverage for defective workmanship that doesn’t exist in the first place.  The court flipped Aspen’s argument on its head.  It focused on a fundamental principle of insurance policy construction – a policy should be interpreted as a whole, with every provision helping to interpret every other provision.  The reason for this rule stems from the reality that contracts generally are carefully written by their drafters to achieve an intended result, and so provisions in those contracts should not be read as meaningless throwaways (or “surplusage,” in legal parlance).

In construing the Aspen CGL policy as a whole, the court observed that, if “occurrence” and “accident” did not include encompass defective workmanship, both the “your work” exclusion and its subcontractor exception would be pointless.  “It would be redundant,” the court wrote, “to say the Policy does not cover property damage to B&V’s own work (as stated in the ‘Your Work’ exclusion) if the definition of ‘occurrence’ categorically and preemptively precludes coverage for such damages in the first place.”

While the dissent argued that the majority was selective in its reading of New York authorities, Black & Veatch is significant in that it continues an important trend in the courts in interpreting policies based on what they(?)say, not what they may have been meant to cover.  The court noted that there has been “near unanimity” in state supreme court decisions since 2012 that construction defects can be “occurrences” under a reading of CGL policies as a whole.  While it remains to be seen whether New York courts will agree with the Tenth Circuit’s reading of New York law, this decision is yet another win for policyholders seeking to insure the risk of defective workmanship of their subcontractors.

This article was written by John L. Corbett of Barnes & Thornburg LLP

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