Category: Uncategorized

Supreme Court Allows Eviction Moratorium to Run Its Course

On 29 June 2021, the Court by a 5-4 vote, denied an emergency request by a group of rental property managers and trade associations to lift the stay imposed by the D.C. Circuit regarding the constitutionality of the Centers for Disease Control and Prevention’s (CDC) federal eviction moratorium. (CDC Order). By denying the request, the Supreme Court is leaving the CDC Order in place through its 31 July 2021 expiration.

Justice Kavanaugh, in a concurring opinion, confirmed that while he believed the CDC exceeded its authority, voted to allow the program to expire on its own “because those few weeks will allow for additional and more orderly distribution” of the funds that Congress appropriated to provide rental assistance to those in need due to the pandemic. This ruling means the almost-certain end of the eviction moratorium. With restrictions set to expire, states are scrambling to establish programs to utilize more than US$21.5 billion in Emergency Rental Assistance Funds (ERA). Absent state or local restrictions, tenants and landlords should be prepared for evictions to begin on 1 August 2021, while continuing to closely monitor federal, state, and local guidance.

CDC EVICTION MORATORIUM

This eviction moratorium began as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)1 signed into law in March 2020 as a 120-day eviction moratorium for rental properties that are part of federal assistance programs or are subject to federally backed loans. Some, but not all, states adopted their own temporary eviction moratoria as well. The CARES Act eviction moratorium expired in July 2020. The CDC then imposed its own eviction moratorium halting residential evictions.2 Congress temporarily extended the CDC order once, and then the CDC extended it several more times to 30 June 2021.3

With the looming 30 June 2021 expiration, and strong pushes from federal and state lawmakers to maintain the eviction moratorium, the CDC extended the nationwide eviction moratorium (CDC Order) through July 2021.4 The most recent CDC Order made clear that “this Order further extends the prior Eviction Moratoria for what is currently intended to be a final 30-day period, until 31 July 2021.”5 President Biden supported the extension for one “final” month.6

ALABAMA ASSOCIATION OF REALTORS

Landlords and realtors challenged the CDC Order throughout the country, including, most notably in a case brought by a group of rental property managers and trade associations in the D.C. District Court claiming that the CDC exceeded its authority in issuing the eviction moratorium.

As detailed in recent alerts (here and here), plaintiffs – rental property managers and trade associations – challenged the lawfulness of the CDC Order on statutory and constitutional grounds, asserting that in issuing the eviction moratorium, the CDC exceeded its statutory authority.

Joining the majority of courts addressing this issue, the District Court ruled that “the plain language of the Public Health Service Act (PSHA) unambiguously forecloses the nationwide eviction moratorium,” and ruled that the PSHA did not grant the CDC the legal authority to impose a nationwide eviction moratorium.7 The Court stayed its order pending appeal. On 2 June 2021, the D.C. Circuit preserved the stay finding that the government made a sufficient showing that it is likely to succeed on the merits.8 Plaintiffs petitioned the U.S. Supreme Court to lift the stay imposed by the District Court.9 Attorneys General for 22 states filed an amici brief with the Supreme Court urging the Court to uphold the moratorium.

SUPREME COURT DECISION

Chief Justice Roberts referred the case to the entire Court for review. The Court ruled 5-4 denying the landlords and realtors request to lift the stay. The Chief Justice, along with Justices Kavanaugh, Breyer, Sotamayor, and Kagan sided against the application to vacate the stay, while Justices Thomas, Alito, Gorsuch and Barrett voted to grant the application lifting the stay thus ending the eviction moratorium.10 In a short concurrence, Justice Kavanaugh “agree[d] with the District Court and the applicants that the [CDC] exceeded its existing statutory authority by issuing a nationwide eviction moratorium[,]” but voted to deny the application to lift the stay in light of the final extension of the moratorium. Justice Kavanaugh reasoned that denying this application will provide those affected by the moratorium with additional time and allow for a “more orderly distribution of the congressionally appropriated rental assistance funds.”11 Justice Kavanaugh expressed his view that the CDC will need “clear and specific” congressional authorization if they attempt to extend the moratorium past 31 July 2021.12

NEXT STEPS

Although the Supreme Court did not provide immediate relief, landlords generally view the decision and Justice Kavanaugh’s concurrence as a victory by acknowledging an overstep by the CDC. In the short term, federal, state, and local governments will have the next few weeks to appropriate rental assistance funds to those in need before the moratorium expires.

The Biden Administration has also proposed actions to stabilize homeownership and the housing market. These actions include providing guidance, allocating, and accelerating the delivery of resources for more than US$21.5 billion in ERA funds; urging state and local courts to participate in eviction diversion efforts; and convening a White House summit for immediate eviction prevention plans.13 Landlords, tenants, and servicers should monitor the rapidly changing state level requirements and guidelines to ensure compliance.

1 Pub. L. No. 116-136, § 134 Stat. 281 (2020).

2 85 Fed. Reg. 55,292 (Sept. 4, 2020).

3 Id.

4 Rochelle P. Walensky, CDC, Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19 (June 24, 2021).

5 Id.

6 Press Release, White House, “FACT SHEET: Biden-Harris Administration Announces Initiatives to Promote Housing Stability By Supporting Vulnerable Tenants and Preventing Foreclosures.” (June 24, 2021). available at

7 Memorandum and Order on Plaintiffs’ Motion for Expedited Summary Judgment, Defendants’ Motion for Summary Judgment and Partial Motion to Dismiss, Ala. Ass’n of Realtors v. U.S. Dep’t of Health & Human Serv., 1:20-cv-03377 (D.D.C. May 5, 2021).

8 Order, Ala. Ass’n of Realtors v. U.S. Dep’t of Health & Human Serv., No. 21-5093 (D.C. Cir. June 2, 2021).

9 Application (20A169) to vacate stay, Ala. Ass’n of Realtors v. U.S. Dep’t of Health & Human Serv., No. 20A-____ (U.S. June 3, 2021).

10 Ala. Ass’n of Realtors v. U.S. Dep’t of Health & Human Serv., 594 U.S. ___ (June 29, 2021).

11 Id.

12 Id.

13 Press Release, White House, “FACT SHEET: Biden-Harris Administration Announces Initiatives to Promote Housing Stability By Supporting Vulnerable Tenants and Preventing Foreclosures.” (June 24, 2021).

Copyright 2021 K & L Gates
For more articles on the eviction moratorium, visit the NLRReal Estate section.

SCOTUS: FTC Has No Authority to Obtain Monetary Relief Under Section 13(b) of the FTC Act

The Supreme Court unanimously held that Section 13(b) of the Federal Trade Commission Act does not give the Commission authority to bypass administrative proceedings and seek equitable monetary relief directly from the federal courts.

Section 13(b) of the FTC Act provides that when the Commission “has reason to believe that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission . . . in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction.”  For over four decades the Commission has relied on this Section to bring consumer protection and antitrust actions directly before federal courts seeking injunctions and monetary relief, such as restitution and disgorgement, bringing “far more cases in court than it does through the administrative process.”  And through this path, the Commission has obtained billions of dollars in relief, securing $11.2 billion in consumer refunds during the past five years alone.

In 2012, relying on Section 13(b), the Commission filed a complaint in federal court against Scott Tucker and his companies, claiming that their short-term payday lending practices were deceptive, unfair, and violated Section 5(a) of the FTC Act.  At summary judgment, the district court granted the FTC’s request for an injunction and monetary relief, ordering Tucker to pay $1.27 billion in restitution and disgorgement, which was to be used by the Commission to provide “direct redress to consumers.”  On appeal to the Ninth Circuit, Tucker contended that Section 13(b) does not give the Commission the authority to seek the monetary relief awarded by the district court.  Adhering to its precedent, the Ninth Circuit found that Section 13(b) “empowers district courts to grant any ancillary relief necessary to accomplish complete justice, including restitution.”  The Supreme Court granted Tucker’s petition for certiorari to address the recent Circuit split concerning the “scope of Section 13(b).”

As previously discussed here , during oral arguments Tucker maintained that because Section 5(l) expressly authorizes the Commission to seek “an injunction and other further equitable relief” in district courts against respondents who violate an Administrative Law Judge’s final cease and desist order, and this provision was amended concurrently with the enactment of Section 13(b), Congress intentionally restricted the Commission’s authority under Section 13(b) to “permanent injunctions” only.  On the other side, the Commission argued that the textual variances reflected the functional differences between bringing a claim through the administrative process first versus going directly to the federal courts, and the enactment of Section 13(b) was Congress giving the Commission a choice of enforcement options.

The Supreme Court ultimately reversed the Ninth Circuit’s judgment and concluded that, based on the statutory language, Section 13(b) “does not grant the Commission authority to obtain equitable monetary relief.”

Specifically, the Court found that not only does Section 13(b) solely reference the ability to seek “injunctions,” but when considering the provision as a whole, including the grammatical structure—“is violating” and “is about to violate” —13(b) “focuses upon relief that is prospective, not retrospective.”  Additionally, the Court considered the structure of the Act and the other provisions that explicitly authorize the Commission to seek monetary relief in federal courts only after going through the administrative process and obtaining a cease and desist order.  This includes Section 5(l), which authorizes district courts to award “such other and further equitable relief as they deem appropriate”, and Section 19, which allows for “such relief as the court finds necessary to redress the injury to consumers.”  Based on these provisions, the Court found it “highly unlikely” that 13(b) would allow the Commission “to obtain that same monetary relief and more” without first having to satisfy the conditions and limitations of going through the administrative process as required by Sections 5(l) and 19.

The Court concluded by remarking that the gap in the Commission’s authority made by its decision may be filled by a legislative fix.  Following the decision, the FTC’s acting Chairwoman, Rebecca Kelly Slaughter, issued a statement urging Congress to “act swiftly and restore and strengthen the powers of the agency so we can make wronged consumers whole.”  Until and unless Congress acts, advertisers are likely to see more administrative proceedings with the FTC, as well as the Commission seeking alternative routes for pursuing monetary relief no longer available under Section 13(b).  Chairwoman Slaughter reaffirmed that during her opening statement on April 27, 2021 before the U.S. House Committee on Energy and Commerce Subcommittee on Consumer Protection and Commerce:  “[A] word about the FTC’s other authorities: we will use them all—administrative proceedings, penalty offense authority, more rule-violation cases, more rulemaking, more civil penalty cases where we have specific statutory authority. But, without Congressional action, none of these options will come close to protecting consumers and incentivizing compliance as much as our lost 13(b) authority. I hope you will move swiftly to restore it.”  To be continued, now in the halls of Congress.

The case is AMG Capital Management, LLC v. Federal Trade Commission, Docket No. 19-508, 593 U.S. __ (April 22, 2021).

© 2021 Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

ARTICLE BY Anna B. Naydonov of Finnegan
For more articles on the FTC, visit the NLR Antitrust & Trade Regulation section.

How the UK Legal Market Adapted to COVID-19: Top Trends for Firms in 2021

Ongoing pressures such as the effects of the coronavirus pandemic are causing disruptions and the shifting of priorities in the UK legal market in 2021, according to findings from the State of the UK Legal Market 2021 report from the Thomson Reuters Institute.  The State of the UK Legal Market 2021 combines research on 250 senior corporate counsel, financial results from the UK operations of 34 US-based law firms and 156 stand-out private practice lawyers.

With law firms switching to fully remote working environments as well as other pressures such as courthouse closures and Brexit, there has been a shift in client priorities. As a result, UK law firms are re-evaluating how their clients’ legal needs can best be met amidst these pressures and disruptions.

How Has the COVID-19 Pandemic Affected UK Law Firm Client Partnerships?

Given the demands that 2020 put on UK corporate legal departments, there was an increased focus on the strength of their relationship with external law firms. The report showed that amidst the shift to remote working, clients are looking to create long-term partnerships with law firms that have a deep understanding of their business operations. The report found that 47 percent of corporate law departments said firms who commit to a long-term partnership create more value in the relationship. This focus on strong interpersonal skills comes as a result of investing non-billable time in clients, the report said.

“This wasn’t the year where clients looked out and said, ‘Hey are we going to bring three or four of our firms on a roster?’ This was the year that clients looked at all of the firms they are currently working with and said, ‘Actually, which two or three do we trust the most?’” said David Johnson, Account Director for Thomson Reuters Acritas in an interview with the National Law Review.  “We’ll start to see firms doing a bit more to make sure that they are that trusted advisor.”

While technology plays an important role both with those working within law firms and with clients, the importance of the more meaningful connection has taken center stage. According to the report, the greatest changes in what drove favorability in the UK market are customer service (17 percent) and a good working relationship (15 percent).

The report predicted that in 2021 and beyond, many firms will strive to create sustainable servicing models that focus on developing a more involved and strategic relationship with clients. Specifically, the report showed that law firms need to appraise which skills are valued most in the industry they serve and then determine how to develop those skills. The top skills that help the UK legal market stand out compared to global markets include being practical and pragmatic, being approachable and friendly and investing in developing good working relationships, according to the report.

“The big things that come through from the UK side from our research in particular is that it’s the ability to be practical and pragmatic in the way that you deliver the work,” Mr. Johnson said. “It’s having industry knowledge. How that feeds into the kind of pain points that their clients are facing is definitely going to be one that we are going to see more of.”

Brexit and Coronavirus Play a Role in UK Legal Market

Alongside higher demand for long-term firm partnerships, the report found that the demand for cross-border legal advice had increased since 2017 because of the uncertainty caused by Brexit. Specifically, 80 percent of UK corporates were looking for international legal support, and 47 percent of UK corporate legal spend was dedicated to international legal work.

“I think the interesting thing here is that we’ve gone through a global pandemic, and we’ve gone through an incredibly disruptive political and economic period. We’re still very much transitioning through that period,” Mr. Johnson said about Brexit. “There’s still a lot more unknowns than knowns in terms of how this is going to play out. I can’t imagine it’s going to drop off dramatically in the next couple of years. I think the challenge is about how firms can organize themselves around this international need to support clients.”

One pain point that developed as a result of remote work during the coronavirus pandemic was the deterioration of collaboration between cross-border teams.  Eighty-three percent of UK partners reported internal barriers to international relationships, including IT and knowledge sharing structures. The report notes firms that foster a culture of collaboration between cross-border teams will be able to better support their clients’ international needs.

This is especially important considering 38 percent of UK corporates are looking to increase their international legal spend moving forward.

Even though UK corporates are looking to increase spend, the report notes that 28 percent of UK-based buyers felt the main thing that could be done to improve their satisfaction with firms was for services to be more competitively priced. Firms that are willing to address pricing issues with clients foster more long-term relationships and bring more, the report noted. This can be achieved through exploring alternative fee arrangements.

However, with increased demand also comes increased competition, according to the report.

How Have UK Law Firms Adapted to Competition During COVID-19?

Alternative legal service providers (ALSPs), non law-firm providers of legal services such as accounting firms, provide competition and increase the pressure on UK law firms to adopt innovative, technology-driven legal service delivery models that can provide greater flexibility and value. As a result, UK law firms are adopting more flexible working arrangements and focusing on technology.

“I think one of the areas that’s going to be here to stay from personal conversations with managing partners in the market is how do you create an office environment that provides that kind of flexibility for those who want to come into the office and those who don’t?” Mr. Johnson said. “I think that discussion has got to be right top and center in terms of managing committees across the next six to 12 months.”

Law firm partners touted a shortened commute, improved efficiency and more productive use of technology as the top benefits of flexible working. According to the report, 86 percent of attorneys want flexible working arrangements to continue after the coronavirus pandemic ends, and would consider leaving their firm if such arrangements weren’t available.

Specifically, stand-out UK lawyers surveyed said they’d like to work remotely two days a week, see a 10 percent reduction in working hours (even with a reduction in pay) and the ability to have different start and finish times or spread hours across the day. However, 80 percent of stand-out lawyers cited remote working as a barrier to developing new business during the pandemic, further highlighting the importance of improving current client relationships.

That being said, law firms are looking to invest more in technology amidst the shift to remote work and increased competition from ALSPs, with 74 percent of senior UK partners believing that their firms should be investing more in technology. Eighty-four percent of corporates think their firms should explore more innovative ways to use technology.

“The ALSP market is not necessarily being adopted as strongly as we’re seeing from the US at the moment, but we’re starting to see more because of the pushback on price and the financial challenges that UK businesses and legal departments are being put under,” Mr. Johnson said. “I think that this is going to become more prominent and we’ll see higher levels of usage of these over the course of the next couple of years. And the last 18 months have accelerated that process.”

How the UK Legal Market May Change After COVID-19

One of the most important takeaways from the report is that clients’ desire for deeper institutional relationships and an increased level of business understanding with firms isn’t new, but that the COVID-19 pandemic amplified the need for an increased focus on these areas. Specifically, the report noted that for the first time, the UK legal industry may be facing the consequences of failing to adapt to those needs earlier.

However, UK firms can emerge from the pandemic in a better position through evaluating the relationship between the firm and its clients, focusing on cross-border collaboration and adopting technology to foster flexibility, efficiency and innovation.

Copyright ©2021 National Law Forum, LLC
For more articles on the UK legal industry, visit the NLR Law Office Management section.

NLR Featured on Return to Work Ultimate Resources Guide

The article Question & Answer Employer Guide: Return to Work in the Time of COVID-19 published on the National Law Review was featured on Humanyze’s list titled Return to Work: The Ultimate Resources Guide. 

Per Humanyze:

“National Law Review provides answers to commonly asked questions related to the return to work, encompassing functional areas such as when to reopen, legal obligations to consider, social distancing guidelines, and resuming meetings, conferences, and business travel, among others.”

 

The Coming Blockchain Revolution in Consumption of Digital Art and Music: The Thinking Lawyer’s Guide to Non-Fungible Tokens (NFTS)

First there were CryptoKitties. Then came digital art, CryptoPunks and NBA Top Shot. But when Beeple’s digital art piece “Everydays: The First 5000 Days” sold at Christie’s for US$69 million, the NFT mania truly began. And as with any wave of media mania, there also came the groundswell of negative media and hand-wringing about NFTs.

We believe it is time to address the pros and cons of NFTs from a thoughtful, legal perspective. NFTs are not all evil nor are they a panacea for artists and musicians. Here are our thoughts on the most common questions we have received from our clients about NFTs.

WHAT ARE NFTS?

NFTs are non-fungible tokens issued on a distributed ledger such as a blockchain. They are similar to cryptocurrencies like bitcoin in that they can be identified individually and are authenticated through a decentralized system of nodes via a consensus protocol. However, they differ from cryptocurrencies in that they are each unique, indivisible, and “non-fungible.”1 NFTs are stored in “smart contracts,” which are automatically executable code that run on top of the distributed ledger on which the NFT is recorded. They provide a method of “provable uniqueness” and ownership for pieces of digital art, images, music and other content. NFTs are provably unique because each image and piece of content is linked to a single token stored in a smart contract on the distributed ledger and its ownership can be irrefutably established. While others may have copies of the same content, only one person can own the specific token authenticating ownership of the content. Currently, most, but not all, NFTs operate on the Ethereum blockchain. NFTs may help realize the long-touted but practically elusive goal of making blockchain technology a powerful tool to protect artists’ rights to benefit from their creations without the need of intermediaries and to protect investors by helping establish provenance of art works.

WHY ARE PEOPLE SPENDING MASSIVE SUMS ON NFTS?

NFT purchasers often are collectors who view NFTs as a way to support their favorite artists, actors, musicians, and athletes. While there have been some recent high profile large dollar sales, most NFT sales are at a reasonable price that provides a much-needed way for artists, collectors, and musicians to monetize their work. As with collectors of many items (antiques, baseball cards, art) many collectors purchase NFTs because they hope they will increase in value and will be a good investment. The legal and regulatory analysis of an NFT will be heavily influenced by how it is intended to be used and how it is marketed. Whenever there are high-profile stories of ordinary people getting rich from new technology, some bad actors will try to take advantage of the situation.

WHAT ADVICE WOULD YOU PROVIDE TO ARTISTS OR MUSICIANS WHO WANT TO ISSUE THEIR OWN NFT?

Given recent high-profile stories of people getting rich from new technology, there have been media reports of bad actors who will try to take advantage of the situation.2 If you are an artist or musician who is interested in issuing NFTs as a way to monetize your creative content, you need to be careful on how you proceed. For instance:

  • Ensure that the piece of art/image, digital music or other creative work associated with the NFT is unique and authenticated. Ensure that you have all of the rights necessary to reproduce and distribute the work.
  • Work only with a reputable technology company that will issue the token on your behalf in a manner that is transparent and secure.
  • Inquire about the technology company’s position on payment of royalties. While certain token standards prohibit royalties (because they are viewed as stifling the ability to freely transfer tokens) there have been discussions in the Ethereum community about the creation of a royalty standard.3 At present, artists generally receive a payment when their NFTs are initially sold, but often not if they are resold in the future.
  • Work only with a reputable marketplace that does not over-promise or hype the NFTs, and that does not require you to make significant up-front payments in order to issue and sell your NFTs. Find out which blockchain platform the technology company is using. Jodee Rich, founder of NFT issuer Kred and the NFT conference “NFT/NYC”, told us:
    • NFTs are minted on different blockchain platforms. Ethereum is the standard (called ERC721). Minting and transacting on the Ethereum blockchain is really expensive. We recommend minting on Ethereum compatible blockchains (such as Matic) which are just as effective and much less expensive.
  • Make sure disclosures are clear regarding the purpose of the NFTs as a royalty vehicle, whether there is expected to be an established trading market for them, risk factors or other special considerations, and whether they are or are not investment contracts or other types of securities.

WHAT ADVICE WOULD YOU PROVIDE TO COLLECTORS WHO WANT TO PURCHASE NFTS?

Prospective purchasers of NFTs should keep in mind that, while the NFTs may have some similarities to other collectibles, such as artwork, comic books, music, or trading cards, they also differ from those traditional physical assets in important ways:

  • You are purchasing a unique piece of code on a blockchain that is linked to the product. You will not have a piece of art that can be hung on a wall; rather, you will need to store your NFT in a digital asset wallet, whether a wallet you control or one provided by a third-party.
  • Purchase an NFT that you personally like from an artist you admire as a collectible.
  • While the value of an NFT may be influenced by the reputation of the artist and the provenance of the NFT and the art work that it represents, do not expect that your purchase will necessarily increase in value or maintain a stable value.
  • Recognize that while you own the token with code linked to the provably unique image or other work, others may have copies of the underlying work. But only you can own that token.
  • Ensure you understand where the underlying work referenced by your NFT is stored. In most cases, the work is not actually stored on the blockchain and the NFT will “point” to a traditional internet site where the work is housed.
  • Understand whether the NFT sponsor is carefully addressing compliance with regulatory requirements, and understand the potential effect on liquidity if the NFT is marketed as a security or a commodity, and understand potential rescission rights if an NFT that is not marketed as a security is subsequently determined to be a security that was issued in violation of the registration requirements of the securities laws.

WHAT ADVICE WOULD YOU PROVIDE TO LAWYERS WHO HAVE CLIENTS INTERESTED IN NFTS?

As with any new product or service, there is some uncertainty about the regulatory landscape for NFTs. Nevertheless, there are some clear rules to follow. If you are a lawyer with clients in this space, here are some top areas of the law that you need to be familiar with. It is important to realize that plaintiffs, prosecutors or enforcement agencies have sought to hold lawyers responsible for advice in other areas of the fast-developing legal framework for digital tokens and cryptocurrencies where that advice was in hindsight considered to have been overly aggressive.

Are NFTs Securities?

As with other blockchain-based tokens, the question of whether a given NFT might be a security will be highly dependent on the facts and circumstances. Being categorized as a “security” could subject an NFT to detailed registration and disclosure requirements, or alternatively to suitability requirements and offering restrictions for transactions exempt from registration. Complying with the registration requirements of the Securities Act would be impracticably expensive, while offering restrictions could make NFTs unsuitable for certain anticipated use cases such as facilitating artists’ rights and royalties. The sale of a one-off NFT that only confers ownership over a piece of art likely would not be considered an offering of securities. However, more complicated transactions related to NFTs could easily cross the line and become securities offerings. For example, projects where large numbers of NFTs are minted and sold and where the issuer creates a platform to support secondary trading of the NFTs could potentially be viewed as a securities offering. Similarly, NFTs that are “fractionalized” and sold to individual investors are also likely to be considered securities.4 To do so, the NFT itself is held by the owner or a custodian and fungible digital tokens that collectively represent 100 percent of the ownership of the NFT are created and sold to third parties. For NFTs minted on Ethereum, the NFT would be created using the ERC-721 standard and “ownership” tokens would be created using the ERC-20 standard.

Finally, if the NFTs or ownership tokens being sold will entitle the holders to a royalty payment or dividend stream related to the underlying music or art, such digital tokens could be deemed securities if the tokens are considered to represent an investment in a common enterprise with an expectation of profits to be derived from the entrepreneurial or managerial efforts of others under the Howey test.5

The Security and Exchange Commission’s (SEC) regulatory guidance and enforcement activities over blockchain-based tokens of all types have evolved rapidly in recent years and continue to evolve to keep pace with technological innovation. Issuers of NFTs and platforms supporting the sales and trading of NFTs should be mindful of the rapid evolution within the recent past of the SEC’s view of digital tokens and the circumstances that could cause it to regard a token as a security even if the token has elements of utility tokens. Lawyers advising clients on NFTs should be familiar with no action letters, and regulatory guidance related to initial coin offerings (ICO), decentralized autonomous organizations, and “utility tokens” and “security tokens,” including the “Framework for “Investment Contract” Analysis of Digital Assets.” Lawyers should pay particular attention to the numerous SEC enforcement actions.6 Lawyers should also be mindful of the SEC statements in the context of ICOs that articulate an expectation that securities lawyers, accountants and consultants as gatekeepers have a special responsibility to help prevent violations of securities law in the design and offering of digital tokens. Moreover, if an NFT (or ownership token) is a security, a transaction that does not prompt regulatory scrutiny could nonetheless result in private litigation, because state and federal anti-fraud statutes typically apply even to securities that are exempt from registration requirements.

Are NFTs Commodities?

Even if an NFT is not a security, if the NFT may reasonably be expected to have secondary market trading and liquidity, a lawyer should also consider whether the NFT is a “commodity” under the U.S. commodity laws. A commodity is typically defined as a reasonably interchangeable good or material, bought and sold freely as an article of commerce, which includes all services, rights, and interests in which contracts for future delivery are traded presently or in the future. In several enforcement actions, the Commodity Futures Trading Commission (CFTC) has taken the view that bitcoin and virtually all other primary digital currencies that are not securities are commodities subject to the anti-fraud and anti-manipulation jurisdiction of the CFTC. Because CFTC-registered trading venues now offer futures contracts and other derivatives with Bitcoin and Ether as the underlying assets, it is now established that those digital assets are in fact commodities under U.S. law.

What are the Intellectual Property Considerations for NFTs?

With respect to intellectual property laws, we recommend that lawyers ensure that the NFT issuer controls all of the rights in the content that are necessary for the reproduction and distribution of the NFT. For example, the owner of rights in a sound recording also would need to control or have license rights to the underlying musical composition performed on the sound recording. The rights in the music composition that were granted to make and distribute the sound recording may not extend to the creation and distribution of one or more NFTs. Although fair use and first sale rights also would apply to the creation, reproduction and distribution of NFTs, no court decisions have yet addressed the application of those doctrines to NFTs. NFT creators and distributors should be quite careful in relying on those doctrines given the current lack of precedent with respect to their application.

Similarly, the distribution of images that utilize trademarks such as product logos generally will require a license from the trademark owner and typically would be outside the scope of any existing trademark license. Brand owners already have entered the NFT markets and are likely to vigorously object to unauthorized uses of their trademarks as part of an NFT.

The owner of an NFT, like the owner of a unique work of art, generally will own only the digital item itself, and not any underlying intellectual property rights, which typically remain with the creator of the work, or their designee. The owner of the NFT therefore will have limited rights to exploit ownership of the NFT, apart from resale of the NFT itself, unless additional license rights are included with the NFT.

What Other State and Federal Laws Should be Considered?

As with most all commercial transactions, transactions involving NFTs will need to consider state and federal consumer protection laws, especially restrictions on unfair, deceptive (and abusive) acts and practices. These broadly construed laws generally prohibit actions that cause unfair harm or mislead parties to transactions. Federal and state regulators have issued various warnings to consumers about the uncertainty of the cryptocurrency industry, and we expect those regulators would have equal concern about the NFT marketplace, especially given its novelty and lack of general consumer understanding. As a result, those involved in NFT transactions should pay particular attention to representations in marketing and other disclosures to ensure their accuracy and thoroughness.

NFTs may implicate other laws depending on their particular characteristics. For example, to the extent an NFT is linked to a cryptocurrency (such as ownership tokens) or other monetary value, state money transmitter laws might be implicated. Forty-nine states have money transmitter laws on their books, and some (but not all) of those laws apply to activities involving cryptocurrency, such as holding cryptocurrency on behalf of others, receiving it for transmission to a third party, or issuing it. If such laws are triggered, a license would be required (unless an exemption or partnership with a licensee applied) and various obligations would apply, such as minimum capital, recordkeeping, examinations, and disclosures.

At the federal level, the same activity that could trigger state money transmitter laws may also trigger an obligation to register with the Financial Crimes Enforcement Network (FinCEN) and implement an anti-money laundering program. FinCEN has issued guidance explaining that it regulates “administrators” and “exchangers” of cryptocurrency and has continued to expand its regulatory oversight of cryptocurrency transactions, including recent proposals to impose new reporting and recordkeeping requirements. Although FinCEN has issued little guidance on NFTs specifically, earlier this month the Financial Action Task Force (FATF), a global anti-money laundering body, proposed revisions to its virtual asset guidance that could subject certain NFTs—such as those that enable the transfer or exchange of value on secondary markets—to regulation. Although FATF has not finalized the proposed revisions, it is unlikely these attempts at regulation will fade, so NFT issuers and exchanges should proceed accordingly.

CONCLUSION

NFTs can be a true win-win for both the sellers and purchasers, as well as for the artists and musicians who use them. The close relationship of many NFTs to works of art, and their popularity with artists and musicians may provide a basis to hope that NFTs will not suffer the challenges faced by the ICO market. However, care should be taken to ensure that the NFT transactions are implemented with clear and transparent terms, and a full understanding from all as to the laws that apply, the underlying nature of the product and how it provides true provable uniqueness.

1 NFTs created using the ERC-721 standard are indivisible.

2 See David Gerard, NFTs: crypto grifters try to scam artists, again (Mar.11, 2021).

3 See James Beck, Can NFTs Crack Royalties and Give More Value to Artists?, CONSENSYS BLOG (Mar. 2, 2021).

4 See here 

5 SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

6 See SEC v. Ripple Labs, Inc., et al., Case No. 20-cv-10832, Southern District of New York, complaint filed December 22, 2020.

Copyright 2020 K & L Gates

ARTICLE BY Daniel S. Cohen,  Clifford C. Histed,
Stephen M. Humenik,  Jeremy M. McLaughlin,
Jonathan M. Miner and  Anthony R.G. Nolan of K&L Gates

Judith Rinearson, Mark H. Wittow and Daniel Charles (DC) V. Wolf contributed to this article. 

Latest Stimulus Package Provides Additional Funding, Expanded Eligibility Under the Soon-to-End Paycheck Protection Program

The American Rescue Plan Act of 2021 (ARP) that was enacted on March 11, 2021, includes additional modifications to the Paycheck Protection Program (PPP). Unlike previous legislative amendments, the changes to the PPP under the ARP are relatively minor, as summarized below.

Slight Increase in Funding Without an Extension to the PPP’s Duration

As previously discussed here, the PPP is set to end on March 31, 2021, and the ARP does not extend the window for borrowers to apply for first or second draw loans, despite calls from borrowers and lenders requesting an extension of the program due to the current backlog of applications at the Small Business Administration (SBA). Reports indicate that hundreds of thousands of applications have been stalled due to processing errors, technical difficulties and a slow implementation of the rules from the last round of amendments to the PPP, and there are concerns that some of the currently pending applications will not be approved by the March 31 deadline. In response to these concerns, Congress is actively considering an extension to May 31, 2021, with the House passing a bill on March 16, 2021 by an overwhelming margin; however, the bill must still clear the Senate before President Joe Biden signs it into law.

Although the ARP includes an additional $7.25 billion for the PPP, bringing total program funding to $813.7 billion, the latest SBA data report on March 14, 2021, indicated that only about $103 billion remained from prior appropriations.

Given the backlog in applications and the relatively small increase in funding under the ARP, borrowers that are interested in applying for a first or second draw PPP loan should submit applications as soon as possible.

Expanded Eligibility

The ARP expands PPP eligibility to certain internet-only news publishers, additional tax-exempt groups, and larger nonprofit organizations.

Internet-Only News Publishers

Certain internet-only news and periodical publishers that previously were ineligible may now participate in the PPP. Specifically, the new eligibility rules include those business concerns or other organizations assigned NAICS Code 519130 (“Internet Publishing and Broadcasting and Web Search Portals”) that meet all these conditions:

  • Do not employ more than 500 employees, or the size standard established for this NAICS code per physical location
  • Certify in good faith that they are internet-only news or periodical publishers and are engaged in the collection and distribution of local or regional and national news and information
  • Further certify in good faith that proceeds of the loan will be used to support expenses at the component of the business concern or organization that supports local or regional news

Tax-Exempt Groups

The ARP also expands PPP eligibility to certain tax-exempt groups listed under Section 501(c) and exempt from tax under Section 501(a) of the Internal Revenue Code, including labor organizations, social and recreation clubs, fraternal benefit societies, and religious educational groups that were previously barred from applying under SBA rules. Sections 501(c)(4) (social welfare organizations) and 501(c)(19) (certain veterans’ organizations) remain excluded under the new eligibility rules. The newly eligible tax-exempt entities may apply for PPP loans if an entity meets all the following conditions:

  • No more than 15% of the entity’s receipts are from lobbying activities.
  • Lobbying activities comprise no more than 15% of the entity’s total activities.
  • The cost of lobbying activities did not exceed $1 million during the most recent tax year that ended prior to February 15, 2020.
  • The entity employs no more than 300 employees.

Larger Nonprofit Organizations

Under prior PPP eligibility requirements, certain large nonprofits, such as Section 501(c)(3) groups, were ineligible if they employed more than the SBA’s size standard for the relevant industry and were previously also subject to the SBA’s restrictions for affiliated entities. The ARP makes some of these larger nonprofits eligible for PPP funding. Specifically, Section 501(c)(3) organizations and veterans’ organizations that employ no more than 500 employees per physical location will now be eligible for PPP loans. In addition, Sections 501(c)(6) organizations, domestic marketing organizations, and Section 501(c) organizations that are tax exempt under Section 501(a) — except for Sections 503(c)(3), 503(c)(4), 503(c)(6), and 503(c)(19) — are eligible to apply if they employ no more than 300 employees per physical location.

COBRA Premium Subsidy Payments Excluded from Loan Forgiveness

Lastly, because the ARP provides COBRA premium subsidies that are eligible for a 100% reimbursement via a payroll tax credit, COBRA premium subsidy payments will be excluded as eligible payroll expenses for PPP loan forgiveness for those PPP loans received on or after March 11, 2021.

Newly and previously eligible first or second draw loan borrowers that need help applying before the March 31, 2021 deadline should contact counsel for assistance before and during the application process.

© 2020 Jones Walker LLP
ARTICLE BY Curtis R. Hearn,  Aimee Andrepont Decuir,
Emily Gauthier and John W. Zimmer, III of Jones Walker LLP
For more articles on the ARP, visit the NLR Coronavirus News section.

2021 California Employment Law Roundup

As 2021 is quickly approaching, employers in California are reminded to make any necessary changes to their policies due to the expansion of the California Family Rights Act and other new legislation. We have set forth below a brief summary of some of the key new laws impacting many California employers in 2021.

SB 1383 – Expansion of California Family Rights Act

The current California Family Rights Act (“CFRA”), modeled largely after the federal Family and Medical Leave Act (“FMLA”), requires employers with 50 or more employees to provide protected leave rights to employees with at least one year of service, who have worked at least 1,250 hours during the past 12 months, and who are employed at a worksite with 50 or more employees within 75 miles. However, effective January 1, 2021, SB 1383 eliminates the requirement that employees work at a worksite with 50 or more employees within 75 miles and expands the CFRA to now apply to all private employers with five or more employees. As a result, the CFRA now applies to large and small employers alike with five or more employees, even if the employer only has one employee in California. The CFRA allows employees to take up to 12 weeks of unpaid leave to care for their own serious health condition (other than pregnancy related medical conditions, which are covered under Pregnancy Disability Leave), or to care for a “family member” with a serious health condition, or to bond with a new child within 12 months of the birth, adoption or foster placement of the new child. SB 1383 has now expanded the CFRA to allow protected leave due to a qualifying exigency related to covered active duty of an employee’s spouse, domestic partner, child or parent in the Armed Forces of the United States, as specified in section 3302.2 of the California Unemployment Insurance Code. The definition of “family member” was also expanded to included siblings, grandparents and grandchildren, which is broader than the FMLA, in addition to child, parent, spouse and domestic partner. As a result, it is possible that an employee may qualify for 12 weeks of CFRA leave that is not available under the FMLA, but then still be eligible for 12 weeks of FMLA leave for a different qualifying reason. SB 1383 also repeals the New Parent Leave Act, which allowed employees employed at a worksite with 20 or more employees within 75 miles to take protected leave for the birth, adoption or foster placement of a child. Now, all employees in California working for employers with five or more employees will be eligible for all of the protected leave rights under the CFRA, regardless of the number of employees working within 75 miles. Also, if both parents work for the same employer, both parents can now each take 12 weeks of protected leave to care for a new child, whereas the FMLA allows both parents to only take a combined total of 12 weeks of leave to care for a new child. Additionally, SB 1383 eliminated the highly compensated “key employee” exception to CFRA leave, which is available to employers under the FMLA. Employers of all sizes should review their existing leave policies because small employers who never had to previously comply with CFRA/FMLA leave and large employers who have worksites in California with fewer than 50 (or 20) employees within 75 miles will need to develop policies and procedures for these new leave requirements and provide CFRA leave to all employees in California.

AB 685 – COVID Exposure Notification

As of January 1, 2021, California employers will have new notice and reporting obligations under Cal/OSHA in regard to COVID-19. AB 685 specifically adds section 6409.6 of the Labor Code which requires employers, within one business day, to provide written notice of a potential COVID-19 workplace exposure to all employees, employees’ exclusive representative (such as a union), and employers of subcontractors who were at the same worksite as a “qualifying individual” within the infectious period. The Labor Code defines a “qualifying individual” as any individual who (1) has a positive viral test for COVID-19, (2) is diagnosed with COVID-19 by a licensed health care provider, (3) is ordered to isolate for COVID-19 by a public health official, or (4) has died due to COVID-19. If such qualifying individual has been at the employer’s worksite during the infectious period, the employer must provide written notice in both English and the language that the majority of the workforce understands of the potential COVID-19 workplace exposure. Employers may communicate this written notice by e-mail, text message, or memorandum. The notice must specifically include information regarding COVID-19 benefits under federal, state, or local laws that are available to employees as well as information regarding the employer’s disinfection and safety plan that it plans to implement and complete per the guidelines of the Centers for Disease Control and Prevention. Employers may not reveal the name of the qualifying individual and cannot retaliate against a qualifying individual for disclosing a positive COVID-19 test or diagnosis or order to quarantine or isolate. Lastly, employers are required to maintain records of notifications for at least three years.

Section 6409.6 of the Labor Code further imposes the obligation for employers to report when there has been an outbreak in their workforce. Specifically, if an employer is notified of the number of cases that meet the California Department of Public Health’s definition of a COVID-19 outbreak, the employer must, within 48 hours, notify the local public health agency of the names, number, occupation, and worksite of employees who meet the definition of a “qualifying individual.” The Labor Code exempts health facilities from this reporting requirement.

AB 685 also adds subsection (h) to section 6432 of the Labor Code, which creates an exemption for COVID-19 where Cal/OSHA may issue a citation without having to provide the employer with a standardized form containing descriptions of why it believe there to be a “serious violation” in the place of employment. This expands Cal/OSHA’s discretion by allowing it to shut down a worksite if it deems employees are exposed to COVID-19 so as to constitute an “imminent hazard.”

These COVID-19-specific changes to the Labor Code will remain in effect until January 1, 2023. In preparation to meet these new requirements, employers should prepare a template COVID-19 notice that is ready to distribute, make a list of all employees, unions, or subcontractors that need to be notified, prepare a disinfection or safety plan, and create training and checklists for supervisors and managers covering the new requirements. It is essential for employers to prepare in advance so that they can meet the 24-hour notice requirement in the event there is exposure in the workplace.

SB 1159 – Workers’ Compensation

Having already gone into immediate effect on September 17, 2020, SB 1159 adds Labor Code sections 3212.86 – 3212.88 which expand the definition of “injury” under workers’ compensation to include illness or death from COVID-19. SB 1159 codifies the rebuttable presumption that an employee who reports having COVID-19 is presumed to have contracted the virus at the workplace and is therefore compensable under certain circumstances. The rebuttable presumption applies only if the employee contracted the virus during a workplace “outbreak,” the definition of which varies depending on the number of employees an employer has, and if the employee was present in the workplace within 14 days before the employee tested for COVID-19.

For workers’ compensation injury claims after July 6, 2020, the employer has 45 days from the date of the claim to gather and submit evidence to deny the presumption that the injury is compensable. Employers should act promptly and present evidence that could rebut the presumption. Such evidence could include measures taken by the employer to reduce potential transmission of COVID-19 at the employee’s place of employment and evidence of an employee’s nonoccupational risks of COVID-19 infection.

SB 1159 also requires an employer who knows or reasonably should know that an employee has tested positive for COVID-19 to report certain information to its claims administrator. This notice must be given within three business days and must include the address(es) of the worksite(s) where the employee worked during the 14 days before the positive test, the date of the employee’s positive COVID-19 test, and the highest number of employees who reported to the workplace in the past 45 days. The notice must not include any personally identifiable information regarding the employee who tested positive, unless the employee filed a workers’ compensation claim. Employers can be issued fines of up to $10,000 for failing to report that an employee has tested positive for COVID-19. The changes and requirements under SB 1159 will remain in effect through January 1, 2023.

AB 1867 – Small Employer Family Leave Mediation Program

To help address the expansion of the CFRA to small employers, AB 1867 establishes a mediation program for family care leave claims brought against small employers. The California Department of Fair Employment and Housing (“DFEH”) pilot program will mediate family care leave claims brought pursuant to section 12945.2 of the California Government Code filed against employers with five to 19 employees. Either the employee or the employer may request the mediation. Employees cannot pursue their claim in court until the mediation is completed. This program is set to end on January 1, 2024.

AB 2257 – Worker Classification

Last year, AB 5 codified the “ABC test” adopted by the California Supreme Court in its 2018 decision of Dynamex Operations West, Inc. v. Superior Court, as used to determine worker classification status for claims brought by independent contractors seeking protections under the California Wage Orders, and AB 5 also expanded the ABC test to other aspects of the Labor Code, including for purposes of unemployment insurance and workers’ compensation benefits. AB 5 also set forth numerous occupations that were exempt from the ABC test and instead were governed by the multifactor test based on the California Supreme Court’s 1989 decision in S.G. Borello & Sons, Inc. v. DIR (the “Borello” test), which makes it easier to qualify as an independent contractor than the ABC test.

AB 2257, which went into immediate effect on September 4, 2020, now establishes various modifications to AB 5. AB 2257 not only exempts certain occupations from the ABC test altogether, but also modifies the requirements to make it easier for certain occupations to qualify as exempt under the ABC test. For example, AB 2257 creates exemptions for licensed landscape architects, specialized performers teaching master classes, registered professional foresters, real estate appraisers and home inspectors, and feedback aggregators, while also revising the conditions and criteria pursuant to which business service providers providing services pursuant to a contract to another business are exempt. AB 2257 also established that referral agencies and service providers providing services to clients through referral agencies are exempt. Employers should seek guidance to assess AB 2257’s specific exemptions and its revisions to the conditions, criteria, and applicable definitions for such exemptions to determine whether AB 2257 applies to or affects their business.

SB 973 – Equal Pay Reporting

Employers with 100 or more employees who are required to file an EEO-1 under federal law will now be required to submit a pay data report to the California Department of Fair Employment and Housing (“DFEH”) for the prior calendar year. The first report is due on March 31, 2021, and annually thereafter. Each report submitted by March 31 covers the prior calendar year. The report to the DFEH shall be made available in a searchable and sortable format and must include two categories of information:

(1) The number of employees by race, ethnicity and sex in each of the following categories: Executive or Senior Level Officials and Managers; First or Mid-Level Officials and Managers; Professionals; Technicians; Sales Workers; Administrative Support Workers; Craft Workers; Operatives; Laborers and Helpers; and Service Workers. Employers shall create a “snapshot” by counting individuals in each category from a single pay period of their choosing between October 1 and December 31 of the prior year.

(2) The number of employees by race, ethnicity and sex, whose annual earnings fall within each of the pay bands used by the United States Bureau of Labor Statistics in the Occupational Employment Statistics survey (https://www.bls.gov/respondents/oes/). Employers shall calculate the annual earnings (defined as W-2 income) and the total number of hours worked by each employee.

AB 1947 – Labor Code Changes

Effective January 1, 2021, section 98.7 of the Labor Code is amended to extend the deadline from six months to one year to file a complaint with the Division of Labor Standards Enforcement (“DLSE”) for discrimination and retaliation claims. This new legislation also makes attorney’s fees recoverable for retaliation claims that are brought under section 102.5 of the Labor Code. This will likely cause an increase in whistleblower claims, especially in response to employees raising complaints about the numerous federal, state and local COVID-19 guidelines.

This article highlights key new laws with broad impact, but employers should be aware that there are other new laws that also may impact them in 2021. We recommend that California employers consult with employment counsel to ensure compliance, as many of these new laws expand the scope of risk for employers and require changes to existing workplace policies and practices.

© 2020 Vedder Price
For more, visit the NLR Labor & Employment section.

To Require or Encourage COVID-19 Vaccine. . . That is the Question

I am pleased to join as one of the regular contributors to the Manufacturing Law Blog. I am a labor and employment lawyer and I will be providing insights from that vantage point, which Matt Miklave has so ably contributed over the past several years. Matt is retiring from Robinson+Cole and we wish him well as he opens his own firm.

After months of countless updates on the status of the COVID-19 vaccine weaving its way through the regulatory approval process, the vaccine has arrived! Now many employers are grappling with a key question – what type of vaccination program can employers implement?

According to guidance issued by the Equal Employment Opportunity Commission (EEOC) on December 16, 2020, employers may implement a mandatory COVID-19 vaccine program for vaccines that have been authorized or approved by the Food and Drug Administration (FDA). As part of that program, employers may inquire as to whether an employee has been vaccinated and request proof of vaccination. That being said, according to the guidance, employers should review requests for reasonable accommodation from employees seeking an exemption from vaccination based on a disability or a religious reason. In reviewing such requests, employers would then determine if an unvaccinated employee would pose a “direct threat” to the health or safety of individuals in the workplace that cannot be reduced to an acceptable level by conducting a case-by-case analysis and taking an approach that is meant to limit potential risks.

In terms of administering the vaccine, the current EEOC guidance suggests that if an employer  uses a third-party, such as a pharmacy or health care provider, with which it does not have a contract, to administer the vaccine, then the third party can engage in relevant pre-screening inquiries of the employees (e.g., why haven’t you had the vaccine, are you taking any medications, etc.). While unlikely to occur at this stage, if an employer administers the vaccine itself or uses a contractor, according to the guidance, the employer would have to ensure that such inquiries are “job related and consistent with business necessity,” consistent with the Americans with Disabilities Act.

While the EEOC’s guidance provides some clarity surrounding this issue, there remain significant legal risks in implementing vaccination programs which are heightened if the employer’s program is mandatory. Arguably the most significant risk would occur if an employee suffers harm after taking the vaccine; in that case, employees may file suit against the employer, arguing that the vaccine was not safe since it was authorized under an “emergency use authorization,” rather than approved by the FDA, among other safety-related arguments; there may be support for this position in a number of agency regulations including the FDA, EEOC, OSHA, and various laws. For unionized employers, there is an additional consideration as  a mandatory vaccination program may be considered a mandatory subject of bargaining, meaning that prior to implementation, the employer would typically have to provide the union with notice and an opportunity to bargain or establish that the collective bargaining agreement permits implementation.

As manufacturers review this issue, it is important to consider whether to implement a voluntary or mandatory program or to simply encourage employees to be vaccinated, what documentation may be required to implement such a program (e.g., waiver, accommodation request form, etc.), what employee communication would be appropriate, among other considerations.

As additional guidance is published, we will keep you updated on this issue.

Copyright © 2020 Robinson & Cole LLP. All rights reserved.
For more, visit the NLR Labor & Employment section.

A Lawyer’s Guide to Enterprise Telecommunications Services Agreements—Part 1

This is the first entry of a two-part series on the services agreements that major enterprises enter into with telecommunications carriers to meet company-wide telecommunications requirements, providing connectivity between enterprise locations, and to cloud resources, suppliers and customers, public voice networks, and the World Wide Web. These agreements may encompass domestic services, services between the United States and other countries (international services), and services between foreign countries (foreign services), or some combination of these.

Enterprises typically acquire wireless services and wireline services under separate procurements and agreements. This series focuses on agreements for wireline voice and data services including Internet access services (“telecom services”).[1] This entry provides an overview of the procurement process and the business deal. The second entry highlights the agreement structure, an approach for counsel to assess business and legal terms, and conditions commonly found in telecom service agreements.

The Basics of Enterprise Telecom Services Procurements

A telecom services procurement is typically initiated to migrate to new or lower cost services, a significant change in telecommunications requirements (due to a major acquisition or geographic expansion), more favorable pricing, the desire to assess the capabilities of other carriers, or a combination of these. The agreements have a 3-5 year term, typically with one or more customer renewal options.

Telecom carriers are selected based on reliability, geographic reach of their networks, diversity of services, and price. Many enterprises rely on a primary carrier, sometimes with another carrier providing redundant service between major locations or to different regions, particularly for international and foreign services. This is true whether the enterprise is a technology firm, a major retailer (online or brick and mortar), a utility holding company, or is engaged in finance, payment processing, logistics, manufacturing, transportation, or energy production or distribution.

A threshold procurement question is whether the customer will rely solely on in-house procurement staff or retain telecommunications procurement consultants to execute the procurement. Engaging telecom procurement consultants may be the prudent approach for many enterprises, as these consultants likely have a better sense of market pricing and carriers’ current offerings and business objectives. Under either approach, a well-conceived RFP demonstrates there is a risk to the incumbent service provider(s) of losing the business and an opportunity for other carriers to win new business.

The in-house procurement team or consultants review current agreements and bills to determine usage, locations, and circuit mix for developing the demand set for the enterprise’s RFP. This is true whether the customer’s current network arrangement of services will be maintained or modified, including utilizing different services. A timely, thorough RFP facilitates an apple-to-apples comparison of responses from interested carriers.

Customer’s counsel should review the RFP, particularly if prepared by a consultant. It is preferable that legal terms and conditions consistent with the Company’s interests and practices be included in the RFP. Non-disclosure agreements (NDAs) protecting a customer’s data conveyed to a consultant and, subsequently, to the carriers receiving the RFP are appropriate.

The Business Deal  

Telecommunications voice and data services, including Internet access services, are standard offerings that are available from multiple carriers. Services generally meet customer expectations. The principal variables are price, geographic reach of the carrier’s network, customer perceptions, and carrier responsiveness to shifting customer requirements.

In addition to Telecom Services, carriers offer managed services that may also be provided by  third parties. Managed services include application routing (SD-WAN), monitoring and managing customer routers, and security, such as VPNs and firewalls. Managed services may be acquired with telecom services[2]. Conferencing services, such as Microsoft Teams and Zoom, are applications enabled by Internet access services and other data services.

Carriers have developed Service Level Agreements (SLAs) for their telecom services. SLAs are routinely elicited for services included in RFPs. We discuss SLAs at greater length in Part 2 of this series.

Apart from a handful of tariffed services, rates for Telecom Services are market-based, determined principally by the efficacy of the procurement process, the customer’s service mix and projected expenditures, and the extent of perceived competition. Many agreements provide for competitive pricing reviews that occur at defined intervals during the term of the agreement. Customers often retain consultants for these pricing reviews.

The efficacy of pricing reviews is one reason telecom services agreements may remain in effect for 10 years, through multiple amendments adding services and changing rates. Another is the challenges of transitioning services from one carrier to another, particularly for enterprises having hundreds of locations throughout the United States or in multiple countries.

There are two categories of rates and charges in Telecom Services Agreements: 1) one-time, non-recurring charges, principally service provisioning charges, and 2) recurring monthly rates, either fixed monthly or variable, usage-based (voice services) rates. Customers typically prefer that charges and rates be expressed in fixed dollar amounts as opposed to percentage discounts of rates in providers’ pricing schedules. Service providers regularly require minimum customer expenditure commitments. Customers prefer aggregate expenditure commitments that are either annual or for the term of the agreement, as opposed to service-specific commitments.

Fixed rate pricing and minimum commitments will be discussed further in Part 2 of this series.

__________________

[1] In terms of regulation, Internet access services are classified as “information services.” In the United States and many developed countries, information services are subject to less regulation than “telecommunications services.”  Another widely used data service, known as MPLS, is sometimes treated as information services. However, these services are universally included in telecom services procurements. For enterprise customers, a major distinction between information services and telecommunications services is the extent to which the respective service types are taxed and subject to regulatory surcharges.

[2] Managed services are not addressed in this two-part series.

© 2020 Keller and Heckman LLP

Transition 2020 | Defense and National Security Policy Under the Incoming Biden Administration

Both major change and desired continuity can be expected. 

Beginning with perhaps the most historically significant change we expect to see in President-elect Biden’s defense and national security organizations, we believe that the Nation will see the first female serving as the Secretary of Defense. Given the number of highly-qualified women who are on the short-list of nominees, with former Obama-era Undersecretary of Defense for Policy Michele Flournoy, former Secretary of the Air Force Deborah Lee James, former National Security Advisor Susan Rice and U.S. Senator Tammy Duckworth (D-WA) reportedly on that list, the probablity is significant that the Biden Administration will bring us the first woman serving in that cabinet post.

As to the defense budget, after three years of increasing Pentagon budgets but despite the exploding federal debt and deficit resulting from the need to manage the COVID-19 pandemic, we do not expect a significant change in overall defense spending under President-elect Biden in the short term. The incoming Biden Administration has essentially stipulated that geopolitical threats have become more challenging or uncertain so as to make major cuts in the near term unwise.  Just over the last few weeks, North Korea has reportedly made headway in developing its submarine-launched strategic nuclear ballistic missile capability.  And, after Washington asked China to close its consulate in Houston and Beijing retaliated by shuttering the US consulate in Chengdu, China continues to take an aggressive territorial posture in the South China Sea.  Cutting defense will be even tougher if the Senate remains in the hands of the Republicans and with the reduced Democratic majority in the House.

Over the intermediate to long term, however, we expect that the pressure the progressive wing of the Democratic Party will bring to bear to reduce defense spending, will be considerable.  Interestingly, this could be a replay of the post-end of the Soviet Union period in the early 1990s, when Progressive Democrats and Republican deficit hawks aligned to pursue the so-called Peace Dividend.  While the geopolitics of this moment are vastly different, the swollen deficit as the result of emergency pandemic spending could once again align political opponents.

Nonetheless, we expect a Biden Pentagon to take a hard, realistic look at extracting savings and efficiencies from how the Department of Defense does business.  This is particularly likely if former Obama-era Deputy Chief Management Officer Peter Levine, who also performed the duties of the Undersecretary of Defense for Personnel and Readiness, serves in a position of responsibility. Everything from the Department’s back-office operations to its major weapon systems programs will be on the table. Under such a review, both retiring legacy systems in favor of new technology solutions, and cancelling acquisition programs still in early development and without a congressional constituency or those that do not help the U.S. prepare for great power competition with Russia and China, would be fair game.  Interestingly, the desire to look at legacy systems in this context—a not uncontroversial proposition—was originally identified by the House Armed Services Committee’s bipartisan Future of Defense Task Force 2020. This appears to suggest that, triangulating with a Biden national security apparatus, the defense and national security policy center of gravity on the Hill may shift discernably to that Committee under Chairman Adam Smith, from the Senate.

Furthermore, we believe that defense acquisition and contracting management in a Biden Pentagon, will continue to support commercial procurement policy and regulations, especially those that engender access and cooperation with the national security innovation base.  Especially if Obama-era acquisitions chief Frank Kendall; former Undersecretary of Defense for Personnel and Readiness Alan Esteves; or Pentagon senior executive (and current CSIS director) Andrew Hunter, are appointed to relevant positions of responsibility, we expect that the Biden Administration will continue seeing as a priority expanding the Pentagon’s access to technologies being developed by commercial and non-traditional defense companies, which do not depend on the Department’s cost-plus research and development funding for their leap-ahead advancements.

In one area, there is certainty of discontinuity—a Biden Administration will cease major defense funding for the completion of Trump’s border wall. While congressional Democrats might be open to approving modest funding for the repair and upkeep of border walls and fencing, they will likely insist (and President-elect Biden will likely agree) to end funding for the hundreds of additional miles of wall that Trump made a top issue during his 2016 campaign and throughout his presidency.

Over the last few weeks, President Trump has clearly leaned-in in trying to score some foreign policy wins, particularly regarding troop deployments and treaty negotiations, in the run-up to Election Day. This highlights an important distinction in the approach each principal has/will continue to take to defense and national security policy. Biden will take to these issues an articulable worldview, grounded in the National Security Strategy and the analyses that derive from it.  In the execution of that view, we will likely see the restored use of traditional diplomatic tradecraft.  This will be especially true if we see others (including some Republicans) mentioned for relevant senior positions of responsibility in a Biden Pentagon, State Department or National Security Council, including former Deputy Secretary of State Anthony Blinken; Ambassador Nicholas Burns; Clinton-era Secretary of the Navy Richard Danzig; Kori Schake with the American Enterprise Institute; former Secretary of State Clinton’s Deputy Chief of Staff and National Security Advisor to then-Vice President Biden Jake Sullivan; Obama-era Undersecretary of Defense for Policy Christine Wormuth; former Principal Deputy Undersecretary of Defense for Policy Kathleen Hicks, or Richard Fontaine, CEO of the Center for New American Studies, are in fact appointed. The Administration’s support for, and leveraging of, international institutions and valued alliances will likely make Biden’s national security policy positions (even if one disagrees with them per se) engender comity, stability and predictability—so important to the maintenance of the international political economy.

Against this backdrop, we expect that President-elect Biden will call for an immediate extension of the New START Treaty with Russia, as the current treaty expires about a month after he assumes office. Moreover, given the dearth of analysis supporting Trump’s proposed withdrawal of troops from Germany, we expect that Biden will order a pause of those plans to review their costs and military benefits. Also, depending if the Taliban ceases recent hostilities and meaningfully resume negotiations, Biden may suspend major troop movements out of Afghanistan, as well.

Also, having withdrawn from the Cold War-era Intermediate-Range Nuclear Forces Treaty, the Trump Administration has moved ahead with plans to develop a nuclear variant of its submarine-launched conventional Tomahawk cruise missile as a deterrent to Russia. However, as arms-control advocates have highlighted that nuclear-tipped cruise missiles can be especially destabilizing inasmuch as they cannot be distinguished from their conventional cruise missiles versions, we expect that President-elect Biden will put that program on hold.

Finally, on denuclearization, we expect that President-elect Biden will have the U.S. re-enter the Joint Comprehensive Plan of Action (JCPOA) if Iran returns to compliance and will try negotiating with North Korea. The key difference from President Trump’s approach would be that in seeking to rein in North Korea’s ambitions the Biden Administration will involve other allies and partners, including South Korea, Japan, and China.

On climate change policy as it relates to defense and national security, we expect a significant change in rhetoric between what we have seen from President Trump and can expect from President-elect Biden. We say this because, while Trump has conveyed considerable skepticism about climate change, the Pentagon under his Administration has sought and supported efforts, including funding, needed to address the Department’s “energy and climate resilience” operational requirements.  That trend line will continue under the Biden Administration.  But, we expect that the Biden Administration’s rhetoric on this issue will underscore the need to prepare and protect bases from floods, storms and energy supply disruptions arguably caused by climate change more vividly and cite that risk in support of Biden’s broader policy priority on combating climate change.

By far the most significant area of policy continuity between the two Administrations will be the recognition that, while the US emerged from the Cold War with a substantial military lead over any potential rival, the US has not kept pace with China’s and Russia’s military modernization. The Biden Administration will share the Trump Administration’s understanding of China as the United States’ foremost strategic competitor and the need to prepare for great power competition, as prescribed under the most recent National Defense Strategy. While Russia’s strategic nuclear capability and its continuing efforts to undermine democracy worldwide makes it a more immediate national security threat to the US than China, systemic economic factors, if left uncorrected, will likely have Russia recede as a global power over the long run.  However, as the ODNI has observed, China and Russia are more strategically aligned today than at any other time since the 1950s.

With this in mind, we expect to see the Biden Administration continue pursuing, if not expanding, the whole-of-government approach that the Trump Administration has taken to circumscribing Chinese global dominance and Russian malign activity—particularly in the area of technology and innovation, as advancements in artificial intelligence (AI)/machine learning (ML), biotech, quantum and advanced computing, space tech and cybersecurity, among others, are making traditional battlefields increasingly irrelevant.  Specifically, we expect to continue seeing the combined and enhanced use of various economic instruments of national power, including, trade (sanctions) policy; export controls; post-FIRRMA CFIUS; access to capital (especially to commercial technology startups and technology research institutions); economic development assistance; export financing assistance; policies intended to address supply chain management risk (particularly cybersecurity risk); insourcing initiatives, including domestic content preferences, etc., to address this policy imperative. A review of not only the incoming Administration’s policy papers but also the composition of its landing team make clear that a Biden national security apparatus will share the Trump Administration’s appreciation of the US homeland’s vulnerability to adversaries improving their ability to wage cyberwarfare against civilian infrastructure, financial institutions, and healthcare facilities and the need to prioritize relevant defense capabilities within both the Department of Defense and the private sector.

Another major policy area of continuity will be the Trump Administration’s insourcing initiative, which both Administrations believe will be necessary to support the U.S. manufacturing base in vitally important economic sectors such as microelectronics.  Also continuing, if not strengthening, will be measures that started under President Obama’s Secretary of Defense Dr. Ash Carter, but carried forward in earnest by the current Administration, to support and harvest for military use commercially developed emerging technologies, principally artificial intelligence.

If then-Secretary Carter’s Deputy Secretary of Defense Bob Work serves in a position of responsibility, the possibility that the Biden Administration will be especially aggressive in this area will be high, as Work has served as Vice Chair of the National Security Commission on AI during the Trump Administration. In that capacity, Work has been at the forefront of policy issues regarding AI, calling for the U.S. to set aside one percent of the defense budget (around $7 billion annually) for AI projects and creating a private-public partnership among the Pentagon, academia, and the private sector specifically to compete with China’s civil-military fusion strategy.

Over the law few days, an ad hoc group of progressive lawmakers, non-defense think tanks and anti-war groups have raised concerns about President-elect Biden’s defense and national security landing team over its “nearly unanimous links” to top military contractors and have formally appealed the transition team “to recruit a more diversified group of national security thinkers” and “bring some more progressive voices in.” Over the next few weeks, we will consider carefully how the President-elect and his top advisors respond to those concerns, particularly in terms of populating its defense and national security landing team and its short lists for top defense and national security posts in the new Administration—and the policy implications of such responses.

© Copyright 2020 Squire Patton Boggs (US) LLP
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