Category: Uncategorized

We Put the “Ow!” in Iowa

I woke up this morning to a text from a close friend wondering how long it would take me to write about the fact that as of this writing, we still do not have results from the Iowa caucuses last night due to problems with its untried voting app.  I guess I’m firmly established on the “get off my lawn” beat.

The little-known corollary to the time-honored maxim “if it ain’t broke, don’t fix it” is “if it’s broke, don’t replace it with something worse.”    The list of potential problems with using mobile technology for something as important as voting is long.  Rule One might be “don’t hire a company named ‘Shadow, Inc.’ to build your app.”  A fellow Hoya, Matt Blaze, a professor of computer science and law at Georgetown, said that “any type of app or program that relies on using a cellphone network to deliver results is vulnerable to problems both on the app and on the phones being used to run it . . . and that “[t]he consensus . . . is unequivocal . . .[i]nternet and mobile voting should not be used at this time in civil elections.”

Any remote access application will add complexity to a task due to the need for identification, authentication, authorization, and security, of both the device and the person using it, as opposed to a simpler system based on paper or a single machine for each location where any caucus participant could authenticate herself in person. Multiple technology platforms simply increase complexity and likelihood of error. And, as I learned in the mobile payment world, if you are relying on good cell service or wifi availability for your app to do its work, you’re gonna have some unhappy end-users.

Add to these inherent problems that the app was reportedly only put together over the last two months and was inadequately tested.  (Apparently, it was the back-up plan; the original plan was to use the phone to call in votes.  “Hi, do you have Pete Buttigieg in a can?”)

Just because you can doesn’t mean you should.  I have been bringing a yellow legal pad and ballpoint (or “ink pen” down here) to meetings for years.  Clients and colleagues regularly smile indulgently, as if I had just set a butter churn down on the table.  My stock response might be appropriate for the beleaguered folks in Iowa and I offer it here for free:  Paper rarely goes down, never needs to be recharged, doesn’t need an adapter and, best of all: I know how it works.

Copyright © 2020 Womble Bond Dickinson (US) LLP All Rights Reserved.

Read this article on the Hey Data Data blog.
For more on election regulations, see the National Law Review Election Law & Legislative News section.

Letters of Wishes: An Administrative and Moral Headache in Disguise?

1. LETTERS OF WISHES ARE THEORETICALLY SOUND

Trustees may have difficulties determining whether to make distributions when the grantor’s intentions are unclear. Consider a trust provision that provides for a beneficiary’s support in the form of reasonable medical expenses. The trust’s sole beneficiary approaches the trustee requesting a distribution for a gastric bypass surgery. The surgery can cost upwards of $45,000 and is the preferred method of achieving seventy-five pounds of weight loss. However, the surgery may be unsuccessful, and may result in post-operation complications and side effects that could impact the beneficiary’s health and require further distributions. Is the surgery a reasonable medical expense? Should the trustee make the distribution for the surgery?

Depending on the trustee, and his or her relationship to the grantor, the answer to the above questions is likely different. Scholars suggest that trustees should administer a trust “in [the] state of mind in which it was contemplated by the settlor that [the trustee] would act.”[1] If a spouse is serving as a trustee, he or she seemingly has ample opportunity to determine the grantor’s intent. If the drafting attorney is the trustee, the trustee may have gathered insight into the grantor’s mindset and goals while drafting the trust that could be applied to administration. Consider next a corporate trustee who enters the picture well after the grantor’s death. These trustees may have never met the grantor and are unlikely to have anything more than the trust instrument to guide administration. When contemplating a distribution to a beneficiary, each trustee should rely on the terms of the trust to determine whether the distribution should be made, although it is likely that each trustee’s perspective and relationship with the grantor will impact his or her decision.

A significant challenge many trustees face is that terms like health, education, maintenance, support, and best interests are as common in trust instruments as they are interpretive. Because these terms are interpretive, their application can be challenging even for the most diligent trustee; the interplay between these interpretive words/phrases and social, economic, and legal changes that occur during the administration of a trust can prove difficult to manage. In determining whether to make a discretionary distribution what must, or may the trustee rely on? Just the trust instrument? Extrinsic evidence? Personal opinion?

A. Enter the Letter of Wishes

A letter of wishes is a document that allows a grantor to express his or her goals for the trust. Information included can vary, but they offer information about how the grantor wants the trust to be administered by giving insight into the grantor’s state of mind, opinions on distributions, and issues that may arise with the trust’s beneficiaries.[2] These letters can serve two separate but equally important purposes. First, a letter of wishes can give the grantor the sense that the trustee fully understands their goals for the trust and can administer it in accordance with those goals. Second, letters of wishes can give a trustee something to proverbially hang their hat on when looking for guidance as to whether to make a distribution as the letter can clarify a trust instrument’s general terms.

In the example above, a letter explaining the trustee’s hesitance toward making distributions for cosmetic medical procedures would be valuable. Instead of guesswork, a letter outlining the grantor’s interpretation of the trust’s terms can assist a trustee in choosing to make distributions with greater confidence and flexibility.[3] This is the crux of the argument for many proponents of letters of wishes.[4]

2. LOGISTICS OF INCORPORATING A LETTER OF WISHES INTO AN ESTATE PLAN

Though letters of wishes are thought of as an informal tool[5] drafted by the grantor for the trustee’s benefit, the timing and method of drafting should be considered in relation to state trust laws by any practitioner who recommends its use to a client. Consideration should also be given to whether the letter should be incorporated into the trust as an exhibit or whether the letter should bind the trustee.

A. What is the Ideal Time to Draft a Letter of Wishes?

Practitioners should consider advising clients to draft letters of wishes close to the time the trust is settled in order to avoid disputes over whether the letter is representative of the grantor’s intent.[6] The following is illustrative: in 2017, immediately after selling his business, at his attorney’s advice, Grantor executes a discretionary trust for Grantor’s grandchildren to provide for their college educations. In 2022, the Grantor is now retired and has time to finally read the education trust that his attorney prepared for him.  At that time, the Grantor writes a letter of wishes explaining the grantor’s preference for distributions from the trust that further the pursuit of a STEM college education by Grantor’s grandchildren.  Shortly thereafter, all but one of Grantor’s grandchildren enroll in college to pursue liberal arts degrees.  The golden grandchild enrolls in a STEM program at his grandfather’s alma mater. The letter of wishes, drafted well after a significant passage of time, reflects that perhaps the Grantor’s opinions and relationships with his grandchildren may have changed. The trust does not have sufficient funds to cover the college tuition for all of the grandchildren and so the trustee must determine whether or not to make tuition payments for each grandchild or only certain grandchildren.  What is the trustee to do – follow the terms of the trust or follow the current wishes of the grantor?  Because of the timing as to the execution of the letter of wishes – there is an argument that the letter of wishes should be ignored.

Hugh v. Amalgamated Tr. & Sav. Bank[7] illustrates how timing can impact the effectiveness of a grantor’s extrinsic letters.[8] In Hugh, the Illinois Court of Appeals determined that the grantor did not gift land to a trust for the benefit of his grandchildren in part because letters expressing the grantor’s desire that the land be gifted to the grandchildren’s trust were delivered to the trustee several years after the trust was settled.[9] The court noted that the grantor’s exercise of dominion and control over the land in the time between when the grantor settled the trust and drafted the letters and when the letters were actually delivered to the trustee indicated that the grantor’s intent was to retain the property and not to make a gift.[10] Therefore, given the complications that may arise, the timing of the letter is very important.

B. How Involved Should an Estate Planning Attorney be in Drafting a Letter of Wishes?

Practitioners should consider their own involvement in drafting a letter of wishes and how differing degrees of involvement can impact the trust. Letters of wishes are often personal documents that allow a grantor to express his or her feelings about beneficiaries, philosophy on distributions, and goals for how the grantor’s legacy should be maintained.[11] Though the letter may be of great importance to the grantor, significant attorney involvement can complicate the trust drafting process by risking inclusion of precatory language in the trust instrument and presenting an opportunity for a grantor to incur significant legal fees for something of questionable utility. Executing a letter of wishes in conjunction with a trust instrument may cause a grantor to request that language from the letter be incorporated into the trust. Though many estate planning clients are sophisticated, the risk of creating ambiguity in the trust with emotional, personal, and imprecise language may be lost on them.[12] This risk should not be lost on their attorney. Time constraints and workload may cause estate planning attorneys to devote little thought to the letter of wishes, even though the letter may be important to the client and may risk insertion of precatory language into the trust document.

C. To be Effective, Must a Letter of Wishes be Incorporated into the Trust?

As letters of wishes are not legally binding on the trustee in and of themselves,[13] grantors must rely on a trustee feeling morally and ethically obligated to administer the trust in accordance with the letter. A solution to this problem may be to incorporate the letter of wishes into the trust as an exhibit. Matter of Estate of Kirk suggests that this option may be feasible as the court found a handwritten note attached to a formal trust amendment to be part of the amendment for purposes of administering the trust.[14] However, some scholars counsel against this, as attaching the letter as an exhibit would make the letter discoverable by beneficiaries, who may use the letter as an opportunity to increase the likelihood of getting a distribution or may find the letter hurtful.[15] Practitioners should counsel clients using this option to be sure that the letter does not contradict the trust instrument’s terms. Contradictions of this sort could be used as evidence of ambiguity, subjecting the trust to attacks from dissatisfied beneficiaries.

D. Should the Letter be Binding on the Trustee?

Scholars agree that letters of wishes should be made explicitly non-binding on the trustee, arguing that binding letters would interfere with the trustee’s discretion and hinder administration.[16] This argument is bolstered by the fact that the purpose of using more general language in a trust instrument is to provide the trustee with flexibility so that the trust can adapt to social, legal, and economic changes that impact administration.[17] Although the lack of litigation over letters of wishes may indicate that letters of wishes are often taken into account and used in administering the trust,[18] grantors should understand that the letters are deliberately non-binding in order to reap the benefits of adaptability. Grantors and their counsel should evaluate the risks of making a letter of wishes binding, and consider the benefits of a non-binding instrument.

3. DIGGING DEEPER: ARE LETTERS OF WISHES TRULY A POSITIVE ADDITION TO AN ESTATE PLAN?

Fast forward 10 years in the hypothetical posed in Part 1. Suppose you are approached by the trustee who has just found the letter expressing the grantor’s distaste for cosmetic procedures. Also assume that the trustee just received the gastric bypass distribution request. The trustee asks the attorney whether he or she must rely on the letter, what do you tell them? What if they ask whether they can exercise their discretion? Or what the trustee’s moral obligations are? Could the letter be deemed an amendment? The answers are unclear, but the following section applies scholarly opinion, statutory authority, and case law to explain how these issues can be addressed by practitioners.

A. Does the Trustee Have to Rely on the Letter?

While scholarly opinion is generally favorable toward letters of wishes, issues can complicate the positive purpose for which these letters are drafted. The first issue is whether the trustee has any obligation to rely on a letter of wishes. While trustees have historically abided by letters of wishes,[19] the letters are usually non-binding and often do not need to be disclosed to beneficiaries.[20] This means that the trustee has no legal obligation to make or forego making distributions in accordance with a letter of wishes.[21] Further, as noted by the restatement, letters of wishes are generally considered private correspondence between the grantor and trustee that offer guidance to the trustee, suggesting that the trustee has no duty to consider or abide by the letter in making a discretionary distribution.[22] Practitioners should be sure to discuss this with clients when deciding who to name as trustee to ensure that the client picks a trustee who is capable of managing the trust financially and effectuating the grantor’s intent to the full extent allowed by the law.

B. If the Trustee Wants to Consider a Grantor’s Letter of Wishes, Can They?

Further, a trustee may not be able to consider a grantor’s letter of wishes even if they want to. For example, Illinois common law provides that the general goal in construing a trust is to determine the grantor’s intent and to give effect to that intent if it is not contrary to law or public policy.[23] The grantor’s intent is to be determined solely by reference to the plain language of the trust itself.[24] Extrinsic evidence is only appropriate if the trust is ambiguous and the grantor’s intent cannot be ascertained.[25] When the language of a document is clear and unambiguous, a court should not modify or create new terms.[26] While Illinois courts have not addressed how a letter of wishes should be treated in relation to these rules of interpretation, Illinois’ Court of Appeals in In re Estate of Crooks noted that a decedent’s letter directing parcels of land to be transferred to him individually—which contradicted his previously executed will, trust, and quitclaim deeds directing the parcels to be transferred to a revocable trust—could not be used by a disgruntled heir to create an ambiguity in the decedent’s will, trust, or quitclaim deeds.[27] This suggests that a letter of wishes would be treated similarly unless there was an ambiguity in the four corners of the trust.

Practitioners should ensure that they are familiar with the statutes and common law governing trust interpretation for the state that governs the trusts they administer. While Illinois is fairly restrictive as far as what the trustee can rely on in administering the trust, Florida is more liberal.[28] In Kritchman v. Wolk, Florida’s Court of Appeals found that co-trustees of a revocable trust breached their duties of prudent administration and impartiality by failing to pay a beneficiary’s education expenses as requested in a letter from the grantor to the co-trustees prior to her death.[29] As such, the state where a letter of wishes is executed could impact whether a trustee may refer to it in administering the trust.[30] Further, the trust’s terms should be considered carefully to determine whether a letter of wishes or other written directive from the grantor should have any impact on administering the trust.

C. Moral and Ethical Obligations

While a trustee is unlikely to be required by law to consider a letter of wishes when administering a trust—and may, in fact, be prohibited from considering such a letter—they may feel a moral or ethical obligation to consider the grantor’s wishes when making discretionary distributions. Scholars suggest that trustees should administer trusts “in the state of mind contemplated by the settlor.”[31] Scholars also note that letters of wishes are “[m]oral and emotional accompaniments to a formal distribution scheme, [which]. . . have an important role to play in the planning process.”[32] This suggests that trustees may feel obligated to administer a trust consistently with a grantor’s letter of wishes. However, as shown by Kritchman, trustees without a personal connection to the grantor may feel no obligation to administer trusts in accordance with a grantor’s letter of wishes and may instead rely solely on the terms of the trust.[33] grantors and attorney’s should consider a potential trustee’s moral or ethical disposition towards a letter of wishes because this sense of obligation may depend on the trustee’s relationship with the grantor.[34]

D. Is the Letter an Amendment?

Depending on the circumstances under which a letter is drafted and signed, in addition to the letter’s content, some could argue that a letter of wishes is an amendment to a trust. Though many trust statutes require amendments to be made in accordance with the trust’s terms, a significant number of states allow a trust to be amended “by any other method manifesting clear and convincing evidence of the settlor’s intent.”[35] Arguably, a letter of wishes expressing a grantor’s specific desire as to what distributions should and should not be made could function as an amendment. However, no United States federal or state court has addressed the issue.

In Illinois, a trust can be amended by reserving the right to amend in the trust instrument.[36] If the trust instrument specifically describes the method for amendment then that method alone must be used to amend the trust.[37] Scholars suggest that Illinois trusts should be drafted in such a way that all amendments must be prepared by a lawyer familiar with the trust instrument.[38] Despite this guidance, the status of a letter of wishes as an amendment to an Illinois trust uncertain. While it is possible that a letter of wishes could be drafted in such a way that it meets the trust’s requirements, it is dependent on the trust instrument’s amendment provision(s). If the grantor wants their letter to function as an amendment, the trust instrument would need to be drafted to ensure that the letter meets the trust instrument’s formal requirements. Drafting a trust instrument in this way may not be advisable because of the potential for introducing precatory language and ambiguity into the trust.

An example serves to further illustrate this issue. Consider a marital trust instrument that allows discretionary distributions for either the beneficiary-spouse’s support or best interests. Assume that both terms are defined with substantive differences. Suppose the grantor drafts a subsequent letter of wishes explaining how the grantor would determine what is in his or her spouse’s best interest, but uses language that mirrors the trust instrument’s definition of support. Should the trust be considered amended to reflect a support standard for all discretionary distributions? The answer depends on the letter’s wording, governing state law, and the trust’s terms. In Illinois, such a letter would be unlikely to amend the trust unless the trust instrument’s amendment provision was drafted to allow for such a letter to function as an amendment.[39] However, a letter of wishes may be more likely to amend a trust in states like Wisconsin[40] and Kentucky[41] that follow the UTC’s more lenient provision.[42]

4. CONCLUSION

While letters of wishes may aid a trustee in administering a discretionary trust and provide the grantor with peace of mind, grantors and their counsel should think carefully about whether a letter of wishes is appropriate for the grantor’s situation. The uncertain state of the law as to the effect that a letter of wishes has on trust administration suggests there is more to letters of wishes than meets the eye. Though scholars generally praise letters of wishes as a means for a grantor to “communicate their cultural beliefs, values, and practices”[43] or as “helpful to a trustee in ascertaining the settlor’s state of mind, objectives, and purposes in establishing [a] discretionary trust,”[44] counsel should be aware that a letter may cause problems in administering the trust instead of solving them.[45] Practitioners who recommend a letter of wishes and/or whose clients choose to include them in their estate plan should advise clients as to the uncertain status of letters of wishes as a viable estate planning tool. Further, any decision to include a letter of wishes in an estate plan should only be made with an understanding of state trust statutes and case law and careful consideration of who to name as trustee.

[1] Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts § 187 (2006).
[2] See Alexander A. Bove, Jr., The Letter of Wishes: Can We Influence Discretion in Discretionary Trusts?, 35 ACTEC J. 38, 39 (2009).
[3] Id.; Edward C. Halbach, Problems of Discretion in Discretionary Trusts, 61 Colum. L. Rev. 1425 (1961) (arguing that the trustee should be given notice of the trust’s purpose and the grantor’s goals and beliefs to administer the trust in the way the grantor intended).
[4] See e.g., Bove, supra note 2, at 43; Henry Christensen III, 100 Years is a Long Time – New Concepts and Practical Planning Ideas, SN025 ALI-ABA 149, 183–84 (2007) (“[A letter of wishes] permits much more flexibility to. . . the trustee, who has more flexibility built into the trust instrument to exercise powers consistently with the intent of the settlor, rather than at the precise direction of the settlor, which was usually expressed in the vacuum of unknown and unanticipated events.”).
[5] Christensen, supra note 4, at 185.
[6] See Wakeman & Fratcher, supra note 1.
[7] 602 N.E.2d 33 (Ill. Ct. App. 1992).
[8] Note that the Hugh court referred to the grantor’s letters as “letters of direction” as opposed to “letters of wishes.” That said, the grantor’s “letter of direction” served essentially the same purpose that a letter of wishes would have.
[9] Id. at 35.
[10] Id. at 35–37.
[11] Bove, supra note 2 at 40; Deborah S. Gordon, Letters Non-Testamentary, 62 U. Kan. L. Rev. 585, 589 (2014).
[12] Both precatory language and ambiguity should be avoided in trust instruments. Trusts with patent or latent ambiguities are subject to having extrinsic evidence used in interpretation. See Koulogeorge v. Campbell, 983 N.E.2d 1066, 1073 (Ill. App. Ct. 2012). Further, including precatory language in a trust runs the risk that the preacatory terms will not be binding on the trustee. See Duvall v. LaSalle Nat. Bank, 523 N.E.2d 974 (Ill. Ct. App. 1988).
[13] See infra § 3(a).
[14] 907 P.2d 794 (Idaho 1995).
[15] See Bove, supra note 2, at 43.
[16] Id. at 43–44 (“Binding instructions on the trustee can interfere with the concept of full discretion and undermine or diminish the opportunity of exercising that judgment. If such instructions are that important and inflexible, they should be included in the body of the trust. . .”); Christensen, supra note 4, at 183–84.
[17] Gordon, supra note 10, at 616.
[18] Christensen, supra note 4, at 183–84. This lack of case law may also be explained by the fact that letters of wishes are likely to be considered non-discoverable trust documents. As such, beneficiaries are unlikely to see letters of wishes unless the trustee voluntarily discloses them.
[19] Id. at 184 (describing how letters of wishes are widely used and that trustees often fulfill their duties as outlined in letters of wishes).
[20] Restatement (Third) of Trusts § 87 cmt. 3 (2007); Bove, supra note 2, at 43–44; Christensen, supra note 4, at 184; Steven M. Fast and Steven G. Margolin, Whose Trust is it Anyway?, SM001 ALI-ABA 187, 199-200 (2006).
[21] Note that some foreign jurisdictions legally require a trustee to consider a letter of wishes in making trust distributions. That said, these jurisdictions do not require the trustee to make discretionary distributions in accordance with the letters nor do the letters create any additional duty for the trustee. Bove, supra note 2, at 41; see also, Anguilla Trusts Ordinance 1994 §13(4); Belize Trusts Act 1992 §13(4); and Niue Trusts Act 1994, §14(4).
[22] Restatement (Third) of Trusts § 87 cmt. 3 (2007); see also Bove, supra note 2 at 42.
[23] Citizens Nat. Bank of Paris v. Kids Hope United, Inc. 922 N.E.2d 1093 (Ill. 2009).
[24] Koulogeorge v. Campbell, 983 N.E.2d 1066 (Ill. App. Ct. 2012).
[25] Stein v. Scott, 625 N.E.2d 713 (Ill. App. Ct. 1993).
[26] Ruby v. Ruby, 973 N.E.2d 36 (Ill. App. Ct. 2012).
[27] 638 N.E.2d 729 (Ill. App. Ct. 1994). However, the court suggested that if the letter, will, trust, and quitclaim deeds had been executed simultaneously, the letter could indicate an ambiguity for which extrinsic evidence could be admitted to determine the decedent’s intent. The Idaho Supreme Court dealt with a similar issue, but decided differently in Matter of Estate of Kirk. 907 P.2d 794 (Idaho 1995). In Kirk, the court allowed a settlor’s handwritten note to be considered for purposes of construing her previously executed trust agreement. Id.
[28] See Fla. Stat. Ann. § 736.0804 (2017) (requiring a trustee to “administer the trust as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.”) (emphasis added).
[29] 152 So.3d 628, 631–32 (Fla. Dist. Ct. App. 2014). Note, however, that the grantor’s letter differed from a standard letter of wishes as it was delivered to the trustee during the grantor’s lifetime pursuant to the trust instrument’s provision allowing her to direct the trust to make payments as requested. Id. at 629–30.
[30] See e.g., Baker v. Wilburn, 456 N.W.2d 304, 306 (S.D.1990) (“[W]hen two or more instruments are executed at the same time by the same parties, for the same purpose and as part of the same transaction, the court must consider and construe the instruments as one contract.”).
[31] Wakeman & Fratcher, supra note 1; Bove, supra note 2, at 38.
[32] Gordon, supra note 10, at 617.
[33] Kritchman v. Wolk, 152 So.3d 628, 630–31 (Fla. Dist. Ct. App. 2014) (describing trustee/defendant’s position that the terms of the trust nullified all of the grantor’s written directives).
[34] See id. at 615 (“These letters, which in general avoid theatricality for simplicity and performance for connection, reinforce the social relationship between writer and recipient without disrupting the estate plan or manipulating the beneficiaries.”).
[35] Unif. Trust Code § 602; see also, Colo. Rev. Stat. Ann. § 15-16-702; Fla. Stat. Ann. § 736.0602(3)(b)(2); Mich. Comp. Laws Ann. § 700.7602; Mont. Code Ann. § 72-38-602; ; N.H. Rev. Stat. § 564-B:6-602;  Ohio Rev. Code Ann. § 5806.02; S.C. Code Ann § 62-7-602; Wyo. Stat. Ann. § 4-10-602.
[36] Parish v. Parish, 193 N.E.2d 761, 766 (Ill. 1963).
[37] Id.; Northwestern University v. McLoraine, 438 N.E.2d 1369 (Ill. App. Ct. 1982).
[38] Robert S. Hunter, § 213:23. Amending the trust agreement, 19 Ill. Prac., Estate Planning & Admin (4th ed. 2016).
[39] Supra § 3(d).
[40] Wis. Stat. Ann. § 701.0602 (2017).
[41] Ky. Rev. Stat. Ann. § 386A.2-020 (2017).
[42] Unif. Trust Code § 602.
[43] Gordon, supra note 17, at 617.
[44] Bove, supra note 2, at 39.
[45] See e.g., Matter of Estate of Kirk, 907 P.2d 794 (Idaho 1995) (describing a conflict between potential beneficiaries over changes in their interests in the decedent’s trust caused by decedent’s handwritten letter attached to a trust amendment).

© Horwood Marcus & Berk Chartered 2020. All Rights Reserved.

For more on Trusts, Grantors and Beneficiaries, see the National Law Review Estates & Trust law section.

Federal Court Preliminary Enjoins Enforcement of New California Arbitration Law AB 51

On Friday, January 31, 2020, Chief District Judge Kimberly J. Mueller of the federal District Court for the Eastern District of California issued a Preliminary Injunction (PI) against the State of California, enjoining the State from enforcing Assembly Bill 51 (AB 51) with respect to mandatory arbitration agreements in employment to the extent governed by the Federal Arbitration Act (FAA).1

As discussed in the Vedder Price employment law alert, TRO Halts New Arbitration Law AB 51, the District Court had previously issued a Temporary Restraining Order (TRO) on December 30, 2019 temporarily enjoining enforcement of AB 51 pending a preliminary injunction hearing scheduled for January 10, 2020. The Court subsequently continued the January 10 hearing and extended the TRO until January 31 to allow the parties time to submit supplemental briefing. AB 51, the new California law previously slated to take effect on January 1, 2020, purportedly prohibited employers from requiring applicants or employees in California to agree, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to arbitrate claims involving violations of the California Fair Employment and Housing Act (FEHA) or the California Labor Code. AB 51 did not specifically mention “arbitration” but instead broadly applied to the waiver of “any right, forum, or procedure for a violation of [the FEHA or Labor Code], including the right to file and pursue a civil action.”

In issuing the PI, the District Court specifically: (a) enjoined the State from enforcing sections 432.6(a), (b), and (c) of the California Labor Code where the alleged “waiver of any right, forum, or procedure” is the entry into an arbitration agreement covered by the FAA2; and (b) enjoined the State from enforcing Section 12953 of the California Government Code [FEHA] where the alleged violation of “Section 432.6 of the Labor Code” is entering into an arbitration agreement covered by the FAA.

The PI will remain in place pending a final judgment, which would likely occur following a motion for summary judgment rather than a full trial on the merits since there are no material facts in dispute to be tried. However, pursuant to 28 U.S.C. § 1292(a)(1), an order granting a preliminary injunction is immediately appealable. Accordingly, it is likely that the State of California will file an immediate appeal directly with the 9th Circuit Court of Appeals.

In the interim, based on this PI, employers should feel comfortable in continuing to require employees in California to sign mandatory arbitration agreements as a condition of employment without being subjected to criminal prosecution under AB 51, provided that the arbitration agreement is clearly governed by the FAA. Employers are encouraged to consult with legal counsel to ensure compliance in this regard.

1 See Chamber of Commerce of U.S., et al. v. Xavier Becerra, et al., Case No. 2:19-cv-02456-KJM-DB, Dkt. No. 44 (E.D. Cal. Jan. 31, 2020).

2 Federal Arbitration Act, 9 U.S.C. §§ 1-16

© 2020 Vedder Price

For more on recent employment law litigation in California and elsewhere, see the National Law Review Labor & Employment law section.

Congress Tackles PFAS on Multiple Fronts

With the enactment of the PFAS Act of 2019 and related provisions in December, opposing forces in Congress came together to force regulatory action on several different aspects of per- and poly-fluorinated substances (PFAS). Issues on which agreement was not reached are now before the Senate in House-passed legislation. While the PFAS debate continues in Congress, federal agencies are now tasked with multiple obligations related to PFAS. Companies that handle PFAS will have added PFAS reporting obligations under both the Toxics Release Inventory and the Toxic Substances Control Act.

The PFAS Act of 2019 is title LXXIII of the massive National Defense Authorization Act for Fiscal Year 2020 (NDAA), Public Law 116-92 (Dec. 20, 2019). This alert summarizes its six subtitles, as well as other PFAS provisions in the NDAA related to the Department of Defense (DOD). It then provides a preview of future legislative developments.

PFAS Act of 2019 Provisions

Subtitle A – Drinking Water Monitoring

EPA must include certain PFAS and classes of PFAS in the fifth Unregulated Contaminants Monitoring Rule (UCMR 5), expected later this year. EPA’s PFAS Action Plan (Feb. 2019) had called for EPA to take this action, but Subtitle A requires it to do so. EPA had included six PFAS in UCMR 3.

The PFAS to be included are all PFAS and classes of PFAS for which EPA has a validated test method for drinking water and that are not subject to a national primary drinking water standard under the Safe Drinking Water Act (SDWA). EPA has a validated test method for 18 PFAS, which it adopted in 2009 and expanded in 2018, EPA Method 537.1. The PFAS Action Plan had predicted additional test methods in 2019, but this did not occur.

The SDWA limits the number of unregulated contaminants that may be included in each UCMR to 30, but the NDAA excludes the listed PFAS from that limit.

Subtitle A also provides grant eligibility through the Drinking Water State Revolving Funds to address PFAS.

Subtitle B – Toxics Release Inventory

EPA’s PFAS Action Plan had set as a long-term action exploring data availability for listing some PFAS as toxic chemicals for purposes of the Toxics Release Inventory (TRI) under section 313 of the Emergency Planning and Community Right-to-Know Act of 1986 (EPCRA). EPA had begun that lengthy process with an advance notice of proposed rulemaking, published on December 4, 2019.

The NDAA disrupted this process later that month. By its terms, Subtitle B automatically added multiple PFAS to the TRI list as of January 1, 2020, and others will be automatically added as certain milestones are reached. EPA posted a list of 160 PFAS that were added as of January 1, 2020. The reporting threshold for all of the chemicals is set at 100 pounds unless revised by EPA within the next 5 years. Reporting on these 160 PFAS will be due by July 1, 2021.

Future automatic additions to the TRI list (as of January 1 of the following year) are mandated whenever:

  • EPA finalizes a toxicity value for a PFAS. (EPA has a provisional peer-reviewed toxicity value for PFBS, adopted in 2014.) Toxicity values are used in risk assessments under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).
  • EPA finalizes a significant new use rule (SNUR) under the Toxic Substances Control Act (TSCA) for a PFAS or class of PFAS.
  • EPA adds a PFAS or class of PFAS to an existing SNUR.
  • EPA designates a PFAS or class of PFAS as active on the TSCA Inventory.

In addition, over the next two years, EPA must determine whether certain listed PFAS meet any of the listing criteria in section 313. If so, EPA must add them to the TRI list within two years of making that determination.

These additions to the TRI list are subject to the provision that, if any PFAS chemical identity is claimed confidential, the PFAS is not added to the list until EPA reviews a substantiation of that claim. If EPA upholds the claim, that PFAS must be added to the list in a manner that does not disclose its identity (such as through a generic name).

Subtitle C – USGS Performance Standard and Sampling

Subtitle C directs the United States Geological Survey (USGS) to coordinate with EPA to develop an appropriate testing methodology for PFAS that is “as sensitive as is feasible and practicable,” with the ability to detect as many “highly fluorinated compounds” as possible. Highly fluorinated compounds are defined to mean PFAS with at least one fully fluorinated carbon atom. USGS must also develop quality assurance and quality control measures to ensure accurate sampling and testing, as well as a training program.

In addition, USGS must carry out nationwide sampling for PFAS. The nationwide sampling program must start with drinking water near locations with known or suspected sources of PFAS. Later stages of sampling will be based on an evaluation by USGS in consultation with the states and EPA to determine where sampling should occur, with an emphasis on direct human exposure through drinking water. The results of the sampling must be sent to EPA and, upon request, the states. In addition, USGS must prepare a report and submit it to certain committees and members of Congress.

EPA’s PFAS Action Plan called for EPA to collaborate with USGS, the Army Corps of Engineers, and universities to lead the science of PFAS.

Subtitle D – Emerging Contaminants

Subtitle D encourages research into “emerging contaminants,” defined broadly to include any physical, chemical, biological, or radiological substance or matter in water for which there is no national primary drinking water standard and that may have an adverse impact on the health of individuals. It mandates several actions to improve the level of technical understanding as well as support for states.

First, EPA, in collaboration with states and other stakeholders, must establish a strategic plan for improving existing federal efforts to identify, monitor, and assist in the development of treatment systems for emerging contaminants and to assist states in responding to human health risks posed by such contaminants.

Second, Subtitle D requires the establishment of a Working Group within 180 days of enactment to coordinate federal activities identifying and analyzing public health effects of emerging contaminants in drinking water. The Working Group will be comprised of representatives from several federal entities, including EPA, the National Institutes of Health, the Centers for Disease Control and Prevention, the Agency for Toxic Substances and Disease Registry, USGS, and others in the discretion of EPA.

Third, it requires the Director of the Office of Science and Technology Policy to establish the National Emerging Contaminant Research Initiative within 180 days of enactment. The goal will be improving the identification, analysis, monitoring, and treatment methods for emerging contaminants, including identifying priority emerging contaminants for research emphasis. Within one year after establishing the research initiative, involved agencies must issue solicitations for grant proposals for research projects consistent with that strategy.

Finally, Subtitle D requires EPA to study the actions it can take to increase technical assistance and support to states with respect to drinking water in emerging contaminants and issue a report to Congress within 18 months. Based on the findings in that report, EPA must develop a program to provide technical assistance to states within three years of enactment. When evaluating applications submitted by states seeking assistance, EPA must give priority to states with affected areas, primarily in financially distressed communities. Emergency assistance may be provided without application. EPA must also establish and maintain a database of available resources developed to assist states with testing for emerging contaminants and make it available to states and stakeholder groups with a scientific or material interest, such as drinking water utilities. The database must be searchable and available through the EPA website.

Subtitle E – TSCA Provisions

Subtitle E requires EPA to take two actions regarding TSCA – finalize amendments to two SNURs for certain PFAS substances by June 22, 2020, and issue a final rule by January 1, 2023, requiring manufacturers of PFAS to report detailed information about their PFAS.

The two PFAS SNURs and the effect of Subtitle E on EPA’s timetable for finalizing them are discussed in another Beveridge & Diamond alert, available here.

Subtitle E also amends TSCA § 8(a) so as to direct EPA to issue a final rule that would require each person who has manufactured a PFAS in any year since 2011 to submit a report that includes, for each year since 2011, detailed information on that PFAS. EPA must issue the rule by January 1, 2023.

The information that a PFAS manufacturer must provide includes, for each such PFAS:

  • Its common or trade name, chemical identity, and molecular structure.
  • Its categories or proposed categories of use.
  • The total amount manufactured or processed, reasonable estimates of the total amount to be manufactured or processed, the amount manufactured or processed for each of its categories of use, and reasonable estimates of the amount to be manufactured or processed for each of its categories of use or proposed categories of use.
  • A description of the byproducts resulting from its manufacture, processing, use, or disposal.
  • All existing information concerning its environmental and health effects.
  • The number of individuals exposed to it, and reasonable estimates of the number who will be exposed to it in their places of employment and the duration of such exposure.
  • The manner or method of its disposal.

Subtitle F – Guidance on Disposal; Research

EPA must publish interim guidance on the destruction and disposal of PFAS within one year of enactment. The guidance must address aqueous film-forming foam (AFFF), soil and biosolids, textiles (other than consumer goods) treated with PFAS, spent water treatment equipment, landfill leachate containing PFAS, and waste streams from facilities manufacturing or using PFAS. EPA must publish revisions at least every three years.

EPA’s Office of Research and Development must examine the effects of PFAS on human health and the environment and make that information public It must also develop a process for prioritizing PFAS and classes of PFAS for additional research. A total of $15 million per year for each of the next five years is authorized for appropriation for this research.

DOD-Related PFAS Provisions of the NDAA

The National Defense Authorization Act includes several PFAS provisions in Title III, related to DOD operations and maintenance at military bases. AFFF containing PFAS, used for putting out fires, is the subject of several provisions. These include prohibiting the uncontrolled release of AFFF containing PFAS, with limited exceptions for emergency response as well as incineration requirements for the disposal of AFFF that must meet the Resource Conservation and Recovery Act (RCRA). The use of PFAS AFFF must be phased out by October 1, 2024, and the use of PFAS in packaging for meals ready-to-eat (MREs) must end by October 1, 2021. There are also provisions for information sharing with municipal drinking water utilities located adjacent to military installations.

Additional PFAS Legislation

During the conference to reconcile the House and Senate versions of the NDAA, the House managers pushed for additional PFAS provisions, but the two sides did not reach agreement on those provisions. On January 10, 2020, the House passed a revised H.R. 535, the PFAS Action Act of 2019, with the votes of 24 Republicans, and sent it to the Senate for its consideration. Senate passage is probably unlikely, particularly in light of the rejection by Senate conferees on the NDAA of some of these provisions.

As revised, H.R. 535 would require a number of regulatory actions on PFAS, including:

  • A requirement that EPA designate PFOA, PFOS, and their salts as hazardous substances under CERCLA § 102(a) within one year of enactment, and determine within five years of enactment whether to designate additional PFAS as hazardous substances.
  • An amendment to TSCA § 4 directing EPA to adopt a rule requiring comprehensive toxicity testing on all PFAS, with a proposed test rule due six months after enactment and a final rule due two years after enactment.
  • An amendment to TSCA § 5 eliminating exemptions for PFAS (such as those for R&D, impurities, and the low-volume exemption).
  • An amendment to TSCA § 5 providing that, for five years after enactment, all PFAS that are the subject of premanufacture notices or significant new use notices are deemed to present an unreasonable risk. EPA would be required to issue orders to prohibit all manufacture, processing, and distribution of those PFAS.
  • An amendment to SDWA § 1412(b) directing EPA to promulgate a national primary drinking water regulation for PFAS (including at last PFOA and PFOS) within two years of enactment. It would also require EPA to publish a health advisory for a PFAS not subject to a national primary drinking water regulation within one year of a finalized PFAS toxicity value or effective quality control and testing procedure for a PFAS, whichever is later.
  • A provision that EPA may not impose a financial penalty for violation of a PFAS national primary drinking water regulation until five years after its adoption.
  • An amendment to the SDWA requiring EPA to establish a program to award grants to affected community water systems.
  • A requirement that EPA adopt a final rule adding PFOA, PFOS, and their salts to the list of hazardous air pollutants under the Clean Air Act § 112(b) within six months of enactment, and to determine within five years of enactment whether to issue final rules adding other PFAS to that list.
  • An amendment of RCRA § 3004 to prohibit unsafe incineration of PFAS.
  • A requirement that EPA revise the Safer Choice Standard of the Safer Choice Program within one year of enactment to identify requirements for certain consumer products to meet to be labeled with a Safer Choice label, including a requirement that they not contain any PFAS.
  • A requirement that EPA issue guidance on minimizing the use of AFFF and related equipment containing PFAS within one year of enactment.
  • A requirement that EPA investigate methods and means to prevent contamination of surface waters by GenX.
  • A prohibition of introducing PFAS pollutants to a treatment works under the Federal Water Pollution Control Act (FWPCA) without first notifying the treatment works of the identity and quantity of each PFAS; whether the PFAS is susceptible to treatment by the treatment works; and whether the PFAS would interfere with the treatment works.
  • A requirement that EPA establish a website containing information on the testing of household well water within one year of enactment.
  • A requirement that EPA develop a risk-communication strategy to inform the public about potential hazards of PFAS.
  • A requirement that EPA publish a plan under FWPCA § 304(m) by September 30, 2021, that contains the results of a review of the introduction into treatment works or discharge of PFAS from categories of point sources (other than publicly owned treatment works). Based on that results of that review, EPA would be required to initiate as soon as practicable the process for adding certain PFAS to the list of toxic pollutants under FWPCA § 307(a), and within two years of publication of the plan to publish human health water quality criteria for other PFAS. EPA would also be required to adopt human health water quality criteria for PFOA, PFOS, and their salts within two years of enactment for each priority industry category, and to adopt a final rule within four years of enactment establishing effluent limitations and pretreatment standards for those PFAS for each priority industry category.

The White House announced on January 7, 2020, that it strongly opposes H.R. 535 and that President Trump’s senior advisors may recommend the bill be vetoed if passed by both Houses.

© 2020 Beveridge & Diamond PC

For more on PFAS regulation, see the Environmental, Energy & Resource section of the National Law Review.

Federal Court Strikes Down HIPAA Fee Limitations for Third-Party Medical Records Requests

On Jan. 29, 2020, OCR released a notice regarding a recent federal court ruling in the case of Ciox Health, LLC v. Azar, et al., where a federal judge in the District Court for the District of Columbia vacated the “third-party directive” within the individual right of access “insofar as it expands the HITECH Act’s third-party directive beyond requests for a copy of an electronic health record with respect to protected health information (“PHI”) of an individual … in an electronic format.”1 Additionally, the court held that the fee limitation set forth at 45 CFR § 164.524(c)(4) should only to an individual’s request for access to their own records, and does not apply to an individual’s request to transmit records to a third party.

The Ciox Health case centered on the restrictions the Department of Health and Human Services (“HHS”) and the Office for Civil Rights (“OCR”) put in place in the 2013 Omnibus Rule 2 and through informal guidance published in 2016 regarding fees that can be charged to patient in searching for, retrieving, and delivering their records and PHI as it pertains to third-party directives. Third-party directives are a mechanism promulgated by the HITECH Act that granted individuals the right to obtain a copy of their PHI maintained electronically, and “if the individual so chooses, to direct the covered entity to transmit such copy directly to an entity or person designed by the individual.”3 Additionally, the HIPAA Privacy Rule permits a reasonable cost-based fee to provide the individual (or the individual’s personal representative) with a copy of the individual’s PHI, or to direct a copy to a designated third party. The fee may include only the cost of certain labor, supplies, and postage (this fee is also referred to as the “Patient Rate”).4

The 2013 Omnibus Rule broadened the third-party directives to PHI maintained in any format, not just electronic records. Moreover, the 2013 Omnibus Rule amended the Patient Rate and required actual labor costs associated with the retrieval of electronic information to be excluded.5

In 2016, HHS issued a guidance document titled Individuals’ Right under HIPAA to Access their Health Information 45 C.F.R. § 164.524 (the “2016 Guidance”).6  The 2016 Guidance made two notable requirements that gave rise to the current litigation. Most significantly, HHS declared that the Patient Rate applies “when an individual directs a covered entity to send the PHI to a third party.”7

“This limitation,” HHS said, referring to the Patient Rate, “applies regardless of whether the individual has requested that the copy of PHI be sent to herself, or has directed that the covered entity send the copy directly to a third party designated by the individual (and it doesn’t matter who the third party is).”8

Additionally, in the 2016 Guidance, HHS provided a methodology to calculate the Patient Rate in requests for an electronic copy of PHI maintained electronically. The methodology would require the entity to determine a fee by calculating the actual allowable costs to fulfill each request or by using a schedule of costs based on the average allowable labor costs to fulfill standard requests. HHS also provided an option for entities to charge a flat rate for requests for electronic copies of PHI not to exceed $6.50 as an alternative to going through the process of calculating these costs.

In this case, HHS was sued by Ciox Health, a medical record retrieval company, over the changes to the Patient Rate set forth in both the 2013 Omnibus Rule and the 2016 Guidance. Ciox Health argued that the $6.50 flat fee is an arbitrary figure that bears no relation to the actual cost of honoring patient requests for copies of their health information, and such a low fee has negatively impacted its business. Ciox Health claims the 2013 Omnibus Rule and the 2016 Guidance, “unlawfully, unreasonably, arbitrarily and capriciously,” restrict the fees that can be charged by providers and their business associates for providing copies of the health information stored on patients.

The district court, in declaring the changes to the Patient Rate set forth in the 2013 Omnibus Rule unlawful, held that HHS cannot rely on its general rulemaking authority to supplement the limited-scope, third-party directive enacted by Congress in the HITECH Act. The court held that the 2013 Omnibus Rule’s expansion of the third-party directive is therefore arbitrary and capricious. Moreover, the district court held that the 2016 Guidance that worked a change into the Patient Rate was akin to a legislative rule that HHS had no authority to adopt without notice and comment. As a result, the court vacated the 2013 Omnibus Rule’s expansion of the HITECH Act’s third-party directive beyond requests for a copy of electronic records with respect to PHI of an individual in an electronic format. The court also declared unlawful and vacated the 2016 Guidance as it extended the Patient Rate to third-party directives without going through notice and comment.

Health care providers and medical records access companies are no longer required to limit the fees charged to their average costs, or charge a $6.50 flat fee, when a patient requests their medical records be transmitted to a third party. The fee limitations will still apply to individuals when they request their own records, however, as decided in the Ciox Health decision, on January 23, 2020.

OCR released a notice on Jan. 29, 2020 that the right of individuals to access their own records and any fee limitations that apply when exercising this right still apply. However, OCR appears to have at least accepted this ruling for now, as it pertains to third-party directives. OCR stated that it will continue to enforce the right of access provisions in 45 CFR § 164.524 that are not restricted by the court order. The court order can be viewed here.

[1] Ciox Health, LLC v. Azar, et al., No. 18-cv-0040 (D.D.C. January 23, 2020)

[2] See Modifications to the HIPAA Privacy, Security,

Enforcement, and Breach Notification Rules Under the [HITECH] Act and the Genetic

Information Nondiscrimination Act; Other Modifications to the HIPAA Rules, 78 Fed. Reg. 5,566

(Jan. 25, 2013).

[3] 42 U.S.C. § 17935(e);

[4] 45 CFR § 164.524(c)(4)

[5] 78 Fed. Reg. at 5,636.

[6] This guidance is available at this link: https://www.hhs.gov/hipaa/for-professionals/privacy/guidance/access/index.html.

[7] Id. at 16.

[8] Id.

© 2020 Dinsmore & Shohl LLP. All rights reserved.

For more on HIPAA medical-records regulation, see the National Law Review Health Law & Managed Care section.

SEC Investigating Cyberattacks Used to Find Secret Company Mergers

SEC Investigating Cyberattacks and Insider Trading

According to Reuters, the Securities and Exchange Commission (SEC) is investigating hacks of email accounts of associates and executives that reveal information on potential mergers. The hackers use a technique known as phishing where they craft emails that trick recipients into logging into malicious websites to steal their email logins. These hacks pose a threat because fraudsters can easily use the information to engage in insider trading.

The group, known as FIN4, allegedly targeted a list of 60 companies in biotechnology, medical instruments, hospital equipment, and drugs. Fireeye reported these cyberattacks in February 2014 and found that they were performed to “obtain an edge on the stock trading.” This will continue to be a problem as more businesses move over to cloud computing, which could lead to a significant increase in data breaches.

The SEC’s Office of Compliance Inspections and Examinations released a report on observations relating to cybersecurity and best practices by financial market participants. The observations are offered as guidelines for firms considering how to improve their cybersecurity preparedness and response procedures. The intent is to highlight specific examples of cybersecurity and operational resiliency practices and controls that firms are taking to safeguard against threats, and how they respond in the event of a breach. The SEC “encourages organizations to review their practices, policies, and procedures with respect to cybersecurity and operational resiliency.” Cybersecurity and Resiliency Observations report.

New Technology & Whistleblower Tips Root Out Insider Trading

The SEC relies on technological developments to accomplish its enforcement goals, including identifying and pursuing insider trading cases. In FY 2018, the SEC implemented a Consolidated Audit Trail, intended to enhance, centralize, and update the regulatory data infrastructure available to market regulators. Once fully implemented, the Consolidated Audit Trail will give regulators quicker access to all trade and order data, facilitating the detection of illegal trading practices, such as insider trading.

In addition to technology, the SEC has increasingly relied on whistleblower tips to identify and halt insider trading. Whistleblowers have been instrumental to expose fraud and expose insider trading secrets.

SEC Rewards Whistleblowers for Exposing Insider Trading 

Under the SEC Whistleblower Program, whistleblower are eligible to receive a reward if their original information about insider trading leads to a successful enforcement action with total monetary sanctions of more than $1 million. A whistleblower may receive an award of between 10 to 30 percent of the total monetary sanctions collected. If represented by counsel, a whistleblower may submit a tip anonymously to the SEC.

© 2020 Zuckerman Law

For more on SEC Insider Trading enforcement, see the National Law Review Criminal Law and Business Crimes section.

U.S. Halting Travel to the U.S. By All Foreign Nationals Who Have Been in China within the last 14 days

The Trump Administration has publicly announced that on 5 p.m. eastern time Sunday, February 2, 2020, it will deny entry to all foreign nationals who have been in China within the last 14 days (since January 19, 2020). This ban does not apply to the following individuals:

(1) Lawful permanent residents (Green Card holders);

(2) Spouses of U.S. citizens and lawful permanent residents;

(3) The parent or legal guardian of a U.S. citizen or lawful permanent resident who is unmarried and under the age of 21;

(4) The siblings of U.S. citizens and lawful permanent residents, provided both are unmarried and under the age of 21;

(5) The child, foster child, prospective adoptee or ward of a U.S. citizen or lawful permanent resident;

(6) Crew members traveling as air or sea crew;

(7) Any foreign national traveling at the invitation of the U.S. government to assist with containing or mitigating the coronavirus;

(8) Foreign nationals holding diplomatic visas, including dependents of such individuals holding derivative visas;

(9) Foreign nationals the CDC has determined would not pose a significant risk to the U.S.; and

(10) Foreign nationals whose entry is determined to be in the national interest or further important law enforcement objectives.

Therefore, the ban applies to any foreign nationals holding nonimmigrant visas such as H, L, O, E, among others, who have traveled in China within the last 14 days (since January 19, 2020).

Any foreign nationals who believe they are subject to this ban may want to explore traveling back into the U.S. before the imposition of the ban at 5 p.m. eastern time Sunday, February 2, 2020.

U.S. citizens who have been in the Hubei Province in the last 14 days will be subject to up to 14 days of mandatory quarantine upon return to the United States. U.S. citizens returning from the rest of mainland China who have been there in the last 14 days will undergo screening at US ports of entry and up to 14 days of self-monitoring.

This ban will remain in effect indefinitely. However, every 15 days, the Secretary of Health and Human Services will recommend to the President whether to continue, modify or terminate the ban.

We will provide updates if more information becomes available.

©2020 Greenberg Traurig, LLP. All rights reserved.

For more US Travel Bans, see the National Law Review Immigration Law section.

California Law Creates New Risk Factor

Last year, California enacted AB 5 imposing the so-called A-B-C test for employee status under California’s Labor Code.  The legislation basically extended the California Supreme Court’s holding in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018) which imposed the test in the more limited context of claims for wages and benefits arising under wage orders issued by the Industrial Welfare Commission.

Although aimed at the gig economy, AB 5 has impacted a wide range of traditional businesses.  For example, it was widely reported last year that Vox media had laid off hundreds of California free-lance writers in response to AB 5.  Not surprisingly, the American Society of Journalists and Authors, Inc., and National Press Photographers Association has filed a lawsuit in federal court challenging the new law (A hearing on California’s motion to dismiss is scheduled for March 23).  A ballot initiative measure is currently in circulation to change for “app-based” transportation and delivery drivers.  This month, the California Trucking Association succeeded in obtaining a federal court order enjoining enforcement of AB 5 as to any motor carrier operating in California.

I am music and I write the songs, but am I an employee?

Great uncertainty still abounds about the applicability, application and even constitutionality of AB 5.  Thus, it is not surprising to see issuers identifying AB 5 as a risk factor in their filings with the SEC.  For example, Warner Music Group Corp.  included this risk factor in its Form 10-K concerning independent songwriters and and recording artists:

“Although we believe that the recording artists and songwriters with which we partner are properly characterized as independent contractors, tax or other regulatory authorities may in the future challenge our characterization of these relationships. We are aware of a number of judicial decisions and legislative proposals that could bring about major reforms in worker classification, including the California legislature’s recent passage of California Assembly Bill 5 (“AB 5″). AB 5 purports to codify a new test for determining worker classification that is widely viewed as expanding the scope of employee relationships and narrowing the scope of independent contractor relationships. Given AB 5’s recent passage, there is no guidance from the regulatory authorities charged with its enforcement, and there is a significant degree of uncertainty regarding its application. In addition, AB 5 has been the subject of widespread national discussion and it is possible that other jurisdictions may enact similar laws. If such regulatory authorities or state, federal or foreign courts were to determine that our recording artists and songwriters are employees, and not independent contractors, we would be required to withhold income taxes, to withhold and pay Social Security, Medicare and similar taxes and to pay unemployment and other related payroll taxes. We would also be liable for unpaid past taxes and subject to penalties. As a result, any determination that our recording artists and songwriters are our employees could have a material adverse effect on our business, financial condition and results of operations.”

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP

For more on California’s AB5 see the National Law Review Labor & Employment Law section.

National Monuments, by Land and by Sea

In 2016, President Obama established an offshore national monument (the Northeast Canyons and Seamounts Marine National Monument) on submerged lands and associated waters in the Exclusive Economic Zone (EEZ) of the United States, i.e., between 12 and 200 miles from the coastline. This preserve covers nearly 5,000 square miles, about 130 miles off Cape Cod. The designation protects deep marine ecosystems, corals, whales, and sea turtles, and prohibits crab and lobster fishing until 2023.

A fishing group challenged the monument designation made under the Antiquities Act, 54 U.S.C. § 320301, which was enacted in 1906 and authorizes the president to declare national monuments by public proclamation. To date, 158 national monuments have been created. In a case of first impression, a panel of the DC Circuit upheld the designation and recognized that the Antiquities Act does not render redundant or nullify the National Marine Sanctuaries Act, which has more procedural hurdles and differing standards in protecting marine sanctuaries than does the Antiquities Act. The court also reiterated that the Antiquities Act protects both surface and submerged lands and that the United States has significant control under domestic and international law over the EEZ to make the designation. Massachusetts Lobstermen’s Association v. Ross, No. 18-5353 (DC Cir. Dec. 27, 2019).

Other pending litigation concerns the authority of the president to remove a monument designation. In 2017, President Trump withdrew monument designations over millions of acres of sacred tribal lands, which opened the areas to mineral leasing and resulted in a lawsuit to challenge the removal of the designation. President Trump’s 85% reduction of the monument designation at the National Monument of Bears Ears in Utah was challenged in US district court. See Wilderness Society v. Trump, No. 1:17-cv-02587. Wilderness Society was consolidated with several similar cases. See Hopi Tribe v. Trump, another DC District Court case, No. 17-cv-02590. These cases are still pending. It is anticipated that the court will address whether the president or the Congress has the authority to withdraw monument designations under the Antiquities Act.

© 2020 Jones Walker LLP

IRS Penalties Assessed Against Your Client May Not Be Valid

Internal Revenue Code section 6751(b) provides that no penalty shall be assessed under the Code unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination, or such higher level official as the Secretary of the Treasury may designate.  This section defines penalty as any addition to tax or any additional amount.  The requirement for prior written approval does not apply to penalties for failure to file a return or pay tax, or to penalties that are automatically calculated through electronic means, but does apply to negligence and substantial understatement penalties, as well as the “responsible party” penalty for failure to withhold or remit payroll taxes.

In Graev v. Commissioner, 140 T.C. 377 (2013), the IRS imposed accuracy related penalties on a taxpayer.  The taxpayer argued that the penalties were invalid because no supervisor’s approval was obtained.  The Tax Court ruled in favor of the IRS, stating that the taxpayer’s challenge was premature because the IRS could comply with approval requirement any time before the Tax Court issued a final determination.  The Graev case was appealable to the Second Circuit Court of Appeals.

In Chai v. Commissioner, 851 F. 3d (2nd Cir. 2017), the Second Circuit Court of Appeals held that Code Section 6751(b) requires the IRS to obtain written approval of an initial penalty determination no later than the date that the IRS issues a notice of deficiency or files an answer asserting the penalty.  In light of the Second Circuit decision in Chai, the Tax Court issued a supplemental opinion in Graev v. Commissioner, 149 T.C. 485 (2018)  and reversed its prior holding regarding Code Section 6751(b).  In the supplemental opinion the Tax Court held that under Code Section 6751(b), the IRS must obtain  written supervisory approval of an initial penalty determination no later than the date that the IRS issues a notice of deficiency or files an answer and that the Government bears the burden of showing that it has complied with Code Section 6751(b).

It is likely that the IRS is now aware of this requirement and will seek the required supervisory approval.  However,  taxpayers should challenge any penalty covered by Code Section 6751(b) and require the IRS to provide proof that the required written supervisory approval was timely obtained.

© 2020 Mitchell Silberberg & Knupp LLP

For more on IRS Code guidance, see theNational Law Review Tax Law section.