Category: Uncategorized

Bruce Lee Enterprises, LLC Sues Chinese Fast Food Chain for IP Infringement

Earlier this month, Bruce Lee Enterprises, LLC sued Shanghai Zhengongfu Fast Food Management Co., Ltd., Guangzhou Zhengongfu Catering Management Co., Ltd., and Guangzhou Zhengongfu Fast Food Chain Management Co., Ltd. (collectively referred to as Zhengongfu (真功夫)) in the Shanghai Second Intermediate People’s Court, asking Zhengongfu to cease using a Bruce Lee image (in marketing materials and signage), issue a public clarification in the media for 90 consecutive days that it has nothing to do with Bruce Lee, and requested the court to order Zhengongfu to pay 210 million yuan in economic losses and 88,000 yuan in reasonable expenses (about $30 million USD).

Zhengongfu was founded in 1990 and now has over 600 restaurants throughout China and is in the only Chinese brand in the top 5 of fast food chains in China.  Zhengongfu has been using a drawn image in store signage and marketing of a martial artist in a yellow top that is reminiscent of Bruce Lee dressed in a yellow-and-black one-piece tracksuit from the movie Game of Death.  Zhengongfu has also registered several trademarks incorporating the martial artist that Bruce Lee Enterprises, LLC alleges is Bruce Lee.  For example, in 2004, Zhengongfu filed for mark 3999537 reproduced below and registered in 2008.  There are at least eleven other Chinese trademarks bearing a similar image registered to Zhengongfu.

CN Trademark No. 3999537
This mark is regularly used in store signage as shown in the photo below of a Shanghai branch of the chain.
By WhisperToMe – Own work, CC0.

In the following screen shot from Game of Death, Bruce Lee, in a yellow-and-black tracksuit, strikes a pose similar to that in the trademark.

Still from Game of Death

The cause of action will most likely be portrait right violation, which is similar to California’s right of publicity and right of publicity for the deceased.  Portrait rights in China are protected in the General Principles of Civil Law, with relevant articles reproduced below:

Article 100 Citizens shall enjoy the right of portrait. The use of a citizen’s portrait for profits without his consent shall be prohibited.

Article 120 If a citizen’s right of personal name, portrait, reputation or honor is infringed upon, he shall have the right to demand that the infringement be stopped, his reputation be rehabilitated, the ill effects be eliminated and an apology be made; he may also demand compensation for losses.

The above paragraph shall also apply to infringements upon a legal person’s right of name, reputation or honor.

Although not explicit in the law, portrait rights in China apply to the deceased as the Supreme Court made clear in Zhou Haiying v. Shaoxing Yuewang Jewellery and Gold Co., Ltd. for violating Lu Xun’s portrait right.  The Court ruled that portrait rights continue after death and a close relative has the right sue on behalf of the deceased.  Accordingly, Bruce Lee’s daughter, Shannon Lee, may need to be a named plaintiff in the current lawsuit.

Further, other cases indicate that drawn or cartoon images of persons are also protected by portrait right.  As long as the person is identifiable in the image, portrait rights are infringed regardless of the medium (painting, sculpture, etc.).  For example, in Beijing Huariling Automobile Trading Co., Ltd. and Zhang Zhensuo (stage name: Zhang Liang), the First Intermediate People’s Court of Beijing held that a cartoon reproduction of the plaintiff violated his portrait rights.

On the other hand, Michael Jordan was less successful in the Supreme Court based on a silhouette of a basketball player not showing any facial characteristics.  The Supreme Court explained “the “portrait” protected by the right of portrait should be identifiable, which should contain enough information to enable the public to identify the corresponding right’s subject, that is, the personal characteristics of a specific natural person, so that it can clearly refer to the corresponding right’s subject…the facial features of natural persons are the most important personal characteristics of their physical features.”

Michael Jordan silhouette

In contrast, in the instant case, multiple characteristics potentially identifiable as belonging to Bruce Lee, including his facial characteristics, are present.  Accordingly, Bruce Lee Enterprises, LLC  and Bruce Lee’s daughter could prevail if the Shanghai Second Intermediate People’s Court rules that the Zhengongfu image is identifiable as Bruce Lee.

© 2019 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

For more IP infringement cases, see the National Law Review Intellectual Property law page.

Who Must Protect the Ukraine-Trump Whistleblower?

Op-Ed From Stephen M. Kohn of the National Whistleblower Center

As the impeachment proceedings heat-up, and calls for the Ukraine whistleblower to be identified increase, there remains a fundamental question:  Who has the legal responsibility to protect this whistleblower?  The answer will surprise you!

There are very few laws mandating what the President, as part of his required and mandatory job duties, must perform.   Guaranteeing that employees who make protected disclosures under the  Intelligence Community Whistleblower Protection Act (“ICWPA”) are fully protected is one of them.  The Ukraine whistleblower is a a federal employee covered under the ICWPA.  He or she made a protected disclosure under the ICWPA.  Thus, it is up to President Trump to fully and completely protect this individual.  Here’s why:  The ICWPA directs that “[t]he President shall provide for the enforcement of the [Act].” It is as clear and simple as that.  The President “shall” “enforce” the whistleblower law that makes it illegal to retaliate against intelligence community whistleblowers.

Every intelligence community whistleblower, whether they be a Democrat, Republican or Independent, is entitled to the same protection from the President.  In the case of the Ukraine whistleblower, the law does not permit the political implications of the whistleblower’s disclosure to have any impact on the mandatory duty of President Trump to fully “enforce” that whistleblower’s right to be free from any retaliation.  The President is required to put his biases or self-interest aside and defend the right of intelligence community whistleblowers to report abuses of authority.  This includes wherever those abuses are committed, including the Oval Office. Under the ICWPA the buck stops with President Trump, impeached or not.

Unlike other whistleblower laws which give the federal courts or independent agencies, like the Merit Systems Protection Board or the Department of Labor, the authority to protect whistleblowers, the ICWPA places that solemn duty directly on the shoulders of the President.  It is the unique legal responsibility of the President.  The President must ensure that the identity of the intelligence community whistleblowers who file  complaints with the Inspector General pursuant to the Inspector General Act, are fully protected.  It is the President who must ensure that every person within the executive branch of government protect the job security of ICWPA whistleblowers.  It is the obligation of the President to punish those who fail to do so.

The ICWPA anti-retaliation law is not limited simply to preventing whistleblowers from being fired.  The law defines the types of “adverse action” the President must shield whistleblowers from, including  “any change in working conditions.”   In the case of the Ukrainian “quid pro quo” whistleblower, the catastrophic impact on the whistleblower’s ability to perform his or her job duties that would be triggered by violating his right to confidentiality is obvious.  This would include undermining his or her ability to work oversees, be promoted to a covert agent (if not one already), or effectively interact with employees in the White House.

Furthermore, breaching the confidentiality of whistleblowers is well established as an “adverse action” under whistleblower law.  Federal courts and administrative agencies as divergent as the SEC and Department of Labor have ruled that revealing the name of a whistleblower is an adverse action.  Anyone with experience working with whistleblowers knows that once their identity is revealed, their working conditions will never be the same, and they will have a target on their back for the rest of their careers.

The procedures applicable to the Ukraine whistleblower actually informed the whistleblower, in writing, that he or she could file a confidential complaint to the Inspector General.   The actual form submitted guaranteed this right.  Once the complaint was filed and accepted by the Inspector General, the whistleblower protections afforded under the ICWPA kicked in.  As a matter of law, it became President Trump’s obligation to “enforce” the ICWPA and ensure that the Ukraine whistleblower suffer no retaliation. It became the President’s non-discretionary duty to ensure the whistleblower suffered no harm.   This may be hard to believe, but the law is the law.

Given the highly public attacks on the whistleblower emanating from the White House it is now incumbent upon President Trump to instruct all employees within the federal government to comply with the ICWPA.  He must take steps to have his Congressional supporters, “stand down” and stop their continued drum beat to “out” the whistleblower.  Regardless of where you stand on impeachment, the President must enforce the requirements of the ICWPA and protect the whistleblower.

When Donald Trump signed onto the job of President, protecting intelligence community whistleblowers became one of his few mandatory job duties.  Like other employees who work for the taxpayers, he many not like all of his required jobs.  Like other employees he may find some parts of his job difficult or distasteful.  But he has no discretion in this matter.  It is a requirement.  He must ensure that the whistleblower is not retaliated against, that the whistleblower’s identity remains confidential, and that the whistleblower can continue in his or her career, free from stigma.    He must hold those who retaliate accountable.  That is part of the job he wanted.  That is the job he must perform.

Copyright Kohn, Kohn & Colapinto, LLP 2019. All Rights Reserved.

Strategic Guidance for the Most Complex EPLI Claim Coming Across Your Desk

Employment Practices Liability Insurance Conference: January 29-30 at Park Lane Hotel in NYC

Designed for claims managers, underwriters, risk managers, in-house or outside counsels to network and benchmark, this event has an agenda packed with enhanced industry perspectives and new developments, strategies and industry trends. 

With a conference faculty comprised of the “who’s who” of EPLI thought leadership you will be prepared to prevent, manage and defend against the increasing number of employment practices liability claims being filed today.

See the agenda for the 28th National EPLI Conference, and learn more about this great event!

EPLI Conference

Employee Video Surveillance: Position of the European Court of Human Rights

On October 17, 2019, the European Court of Human Rights (ECHR) approved the installation of a Closed-Circuit Television (“CCTV”) surveillance system which was used to monitor supermarket cashiers without informing those employees of the fact that it had been installed.

In this case, a Spanish supermarket manager decided to install cameras in the supermarket because of suspected thefts. He installed (i) visible cameras pointing at the supermarket’s entrance and exit of which he had informed the staff and (ii) hidden cameras pointing at the cash registers of which neither employees nor staff representatives had been informed.

The hidden cameras revealed that thefts were being committed by several employees at the cash registers. The concerned employees were dismissed. Some of them brought an action before the Spanish Labor court arguing that the use of CCTV without their prior knowledge was a breach to their right to privacy and that such evidence could not be admitted in the dismissal procedure.

Like French law, Spanish law requires the person responsible for a CCTV system to inform the concerned employees of the existence, purpose, and methods of the collection of their personal data, prior to implementation of the system.

The case was brought before the ECHR, which gave a first decision on January 9, 2018, concluding that Article 8 of the European Convention for the Protection of Human Rights, relating to the right to privacy, had been breached. The case was then referred to the Grand Chamber.

The issue raised was to find the proportionality and the balance between (i) the reasons justifying the implementation of a CCTV system (i.e., the right of the employer to ensure the protection of its property and the proper functioning of its business) and (ii) the employees’ right to privacy.

The ECHR stated that “domestic courts must ensure that the introduction by an employer of surveillance measures that infringe the employees’ privacy rights is proportionate and is implemented with adequate and sufficient safeguards against abuse”, referring to its previous case law [1].

The ECHR considered that in order to ensure the proportionality of CCTV measures in the workplace, domestic courts should take into account the following factors when balancing the interests involved:

  1. Has the employee been informed of the possibility of being subject to a video surveillance measure?
  2. What is the extent of the video surveillance and what is the degree of intrusion into the employee’s private life?
  3. Has the use of video surveillance been justified by the employer on legitimate grounds?
  4. Was there an alternative surveillance system based on less intrusive means and measures available to the employer?
  5. What were the consequences of the surveillance for the employee who was subject to it?
  6. Was the employee concerned by the video surveillance measure offered adequate guarantees?

Therefore, prior notification to the employees is only one of the criteria taken into account in the balance of interests.

In this particular case, the ECHR approved the examination of proportionality of the video surveillance measure. The Judges decided that despite the lack of prior notification to the employees, the CCTV was (i) justified by suspicions of theft, (ii) limited in space (only a few checkout counters), and (iii) limited in time (10 days). The Court also noted that very few people watched the recordings and then concluded that the degree of intrusion into the employees’ privacy was limited.

Consequently, the Grand Chamber considered that there was no violation of the employees’ privacy rights.

Although this decision does not directly concern France, it remains very interesting since French regulations (i.e., the Data Protection Act, the General Data Protection Regulations, and the Labor Code) provide:

  • that the monitoring measures implemented by an employer must not impose restrictions on the employees’ rights and freedoms which would neither be proportionate nor justified by the nature of the task to be performed (Article L. 1121-1 of the Labor Code); and
  • that concerned employees and staff representatives must be informed prior to the implementation of a video surveillance system (Article L. 1222-4 of the Labor Code).

According to French case law, any system that is not compliant with the above is considered illicit and the information collected could not be used as evidence of an employee’s misconduct [2].

The ECHR’s decision seems to challenge French case law: where the absence of prior notification to employees is considered as an overwhelming obstacle by French judges, the ECHR considers that it is merely one of the several criteria to be taken into account to assess the proportionality of the infringement to the employee’s right to privacy.

The question that remains is: what will be the impact of the ECHR’s decision in France?

NOTES

[1] ECHR, Grand Chamber, September 5, 2017, n°641996/08, Bărbulescu c. Roumanie; ECHR, decision, October 5, 2010, 420/07, Köpke c. Germany.

[2] See French Supreme Court, June 7, 2006, n°04-43866 ; French Supreme Court, September 20, 2018, n°16-26482.

Copyright 2019 K & L Gates

ARTICLE BY Christine Artus of K&L Gates.
For more on employee privacy rights, see the National Law Review Labor & Employment Law section.

Senate Introduces Bill to Formalize Joint Framework for Regulating Cell-Cultured Meat Products

Producers of cell-cultured meat – synthetic meat products derived from animal cell cultures that are intended to simulate the taste, appearance, and texture of traditional animal products – may soon receive regulatory direction from Congress. On December 16, 2019, Senators Mike Enzi (WY) and Jon Tester (MT) introduced legislation to codify a joint agreement between the U.S. Food & Drug Administration (FDA) and the U.S. Department of Agriculture (USDA) regulating the development and sale of cell-cultured meat products. The legislation aims to address ongoing uncertainty over which federal agency should regulate the cell culture development process, and would assign authority to USDA to establish appropriate label terms for cell-cultured meat products. The bill arrives even as a number of states have recently acted to prohibit cell-cultured meat products from being labeled as “meat” – and are now facing lawsuits in federal court.

Cell-cultured meat, also called lab-grown meat or “clean meat,” is grown in a sterile laboratory environment. The cell cultures are drawn from either a live or slaughtered animal and grown in a complex multi-step process.[1] They are differentiated and matured to simulate traditional meat products while avoiding many of the environmental impacts associated with traditional animal husbandry. Technology advocates state that cell-cultured meat reduces feed costs, crop footprints, greenhouse gas emissions, and water consumption.

But cell-cultured meat products have not yet been able to offer these benefits at scale, owing in part to high costs currently associated with development and production. Regulatory uncertainty has also created challenges, as regulators have grappled over which federal agency should have primary oversight over the cell-cultured meat production process: while USDA regulates and inspects meat and poultry, FDA generally regulates all other food products to ensure that they are safe for human consumption and labeled accurately. This longstanding framework has prompted a challenging question for regulators and stakeholders alike: should cell-cultured meat products be regulated by USDA under its authority over traditional meat and poultry products, or by FDA, which has historically regulated the types of food manufacturing facilities and laboratories where cell-cultured meat will be grown and produced?

The agencies have already offered their commitment to work together. In November 2018, USDA and FDA issued a press release articulating a joint framework for robust collaboration, wherein FDA would oversee the stages of production from cell collection to differentiation, while USDA would regulate all subsequent processing, packing, and labeling of the products.[2] The agencies formalized their joint agreement in March 2018.

Responding to concerns from livestock industry groups and other stakeholders, a number of states (including Arkansas, Louisiana, Missouri, Mississippi, and Wyoming) subsequently passed laws to prohibit certain animal-derived food products from being labeled as “meat” or a “meat food product.” Several of those laws were subsequently challenged in lawsuits brought by public interest groups.

In the wake of these legal challenges, Senators Enzi and Tester introduced the “Food Safety Modernization for Innovative Technologies Act” (Senate Bill 3053) on December 16.[3] The bill draws from the Joint Agreement and aims to clarify that FDA will oversee the initial cell collection, proliferation, and culturing processes while transferring regulatory oversight of the harvested cells to USDA for regulation related to further processing and packaging. Significantly, the bill provides USDA with exclusive authority over labeling requirements for cell-cultured meat products derived from cell lines of livestock or poultry and assigns USDA with responsibility for establishing “appropriate nomenclature” for these product labels. The bill also requires the FDA and USDA to share information and collaborate during cell differentiation and harvesting. As of this date, the bill has been referred to the Committee on Agriculture, Nutrition, and Forestry and has yet to face a vote.

[1] See Alan Sachs & Sarah Kettenmann, A Burger by Any Other Name, 15 SciTech Lawyer 19 (Winter 2019).

[2] U.S. Dept Agric., Statement from USDA Secretary Perdue and FDA Commissioner Gottlieb on the Regulation of Cell-Cultured Food Products from Cell Lines of Livestock and Poultry, Release No. 0248.18, Nov 16, 2018, available at https://www.usda.gov/media/press-releases/2018/11/16/statement-usda-secretary-perdue-and-fda-commissioner-gottlieb.

[3] Food Safety Modernization for Innovative Technologies Act, S. 3053, 116th Cong. (2019).

© 2019 Beveridge & Diamond PC

For more on Cell-Cultured Meat, please see the Biotech, Food and Drug Law section of the National Law Review.

Reflections on 2019 in Technology Law, and a Peek into 2020

It is that time of year when we look back to see what tech-law issues took up most of our time this year and look ahead to see what the emerging issues are for 2020.

Data: The Issues of the Year

Data presented a wide variety of challenging legal issues in 2019. Data is solidly entrenched as a key asset in our economy, and as a result, the issues around it demanded a significant level of attention.

  • Clearly, privacy and data security-related data issues were dominant in 2019. The GDPR, CCPA and other privacy regulations garnered much consideration and resources, and with GDPR enforcement ongoing and CCPA enforcement right around the corner, the coming year will be an important one to watch. As data generation and collection technologies continued to evolve, privacy issues evolved as well.  In 2019, we saw many novel issues involving mobile, biometric and connected car  Facial recognition technology generated a fair amount of litigation, and presented concerns regarding the possibility of intrusive governmental surveillance (prompting some municipalities, such as San Francisco, to ban its use by government agencies).

  • Because data has proven to be so valuable, innovators continue to develop new and sometimes controversial technological approaches to collecting data. The legal issues abound.  For example, in the past year, we have been advising on the implications of an ongoing dispute between the City Attorney of Los Angeles and an app operator over geolocation data collection, as well as a settlement between the FTC and a personal email management service over access to “e-receipt” data.  We have entertained multiple questions from clients about the unsettled legal terrain surrounding web scraping and have been closely following developments in this area, including the blockbuster hiQ Ninth Circuit ruling from earlier this year. As usual, the pace of technological innovation has outpaced the ability for the law to keep up.

  • Data security is now regularly a boardroom and courtroom issue, with data breaches, phishing, ransomware attacks and identity theft (and cyberinsurance) the norm. Meanwhile, consumers are experiencing deeper and deeper “breach fatigue” with every breach notice they receive. While the U.S. government has not yet been able to put into place general national data security legislation, states and certain regulators are acting to compel data collectors to take reasonable measures to protect consumer information (e.g., New York’s newly-enacted SHIELD Act) and IoT device manufacturers to equip connected devices with certain security features appropriate to the nature and function of the devices secure (e.g., California’s IoT security law, which becomes effective January 1, 2020). Class actions over data breaches and security lapses are filed regularly, with mixed results.

  • Many organizations have focused on the opportunistic issues associated with new and emerging sources of data. They seek to use “big data” – either sourced externally or generated internally – to advance their operations.  They are focused on understanding the sources of the data and their lawful rights to use such data.  They are examining new revenue opportunities offered by the data, including the expansion of existing lines, the identification of customer trends or the creation of new businesses (including licensing anonymized data to others).

  • Moreover, data was a key asset in many corporate transactions in 2019. Across the board in M&A, private equity, capital markets, finance and some real estate transactions, data was the subject of key deal points, sometimes intensive diligence, and often difficult negotiations. Consumer data has even become a national security issue, as the Committee on Foreign Investment in the United States (CFIUS), expanded under a 2018 law, began to scrutinize more and more technology deals involving foreign investment, including those involving sensitive personal data.

I am not going out on a limb in saying that 2020 and beyond promise many interesting developments in “big data,” privacy and data security.

Social Media under Fire

Social media platforms experienced an interesting year. The power of the medium came into even clearer focus, and not necessarily in the most flattering light. In addition to privacy issues, fake news, hate speech, bullying, political interference, revenge porn, defamation and other problems came to light. Executives of the major platforms have been on the hot seat in Washington, and there is clearly bipartisan unease with the influence of social media in our society.  Many believe that the status quo cannot continue. Social media platforms are working to build self-regulatory systems to address these thorny issues, but the work continues.  Still, amidst the bluster and criticism, it remains to be seen whether the calls to “break up” the big tech companies will come to pass or whether Congress’s ongoing debate of comprehensive data privacy reform will lead to legislation that would alter the basic practices of the major technology platforms (and in turn, many of the data collection and sharing done by today’s businesses).  We have been working with clients, advising them of their rights and obligations as platforms, as contributors to platforms, and in a number of other ways in which they may have a connection to such platforms or the content or advertising appearing on such platforms.

What does 2020 hold? Will Washington’s withering criticism of the tech world translate into any tangible legislation or regulatory efforts?  Will Section 230 of the Communications Decency Act – the law that underpins user generated content on social media and generally the availability of user generated content on the internet and apps – be curtailed? Will platforms be asked to accept more responsibility for third party content appearing on their services?

While these issues are playing out in the context of the largest social media platforms, any legislative solutions to these problems could in fact extend to others that do not have the same level of compliance resources available. Unless a legislative solution includes some type of “size of person” test or room to adapt technical safeguards to the nature and scope of a business’s activities or sensitivity of the personal information collected, smaller providers could be shouldered with a difficult and potentially expensive compliance burden. Thus, it remains to see how the focus on social media and any attempt to solve the issues it presents may affect online communications more generally.

Quantum Leaps

Following the momentum of the passage of the National Quantum Initiative at the close of 2018, a significant level of resources has been invested into quantum computing in 2019.  This bubble of activity culminated in Google announcing a major milestone in quantum computing.  Interestingly, IBM suggests that it wasn’t quite as significant as Google claimed.  In any case, the development of quantum computing in the U.S. has progressed a great deal in 2019, and many organizations will continue to focus on it as a priority in 2020.

  • Reports state that China has dedicated billions to build a Chinese national laboratory for quantum computing, among other related R&D products, a development that has gotten the attention of Congress and the Pentagon. This may be the beginning of the 21st century’s great technological race.

  • What is at stake? The implications are huge. It is expected that ultimately, quantum computers will be able to solve complex computations exponentially faster – as much as 100 million times faster — than classic computers. The opportunities this could present are staggering.  As are the risks and dangers.  For example, for all its benefits, the same technology could quickly crack the digital security that protects online banking and shopping and secure online communications.

  • Many organizations are concerned about the advent of quantum computing. But given that it will be a reality in the future, what should you be thinking about now? While not a real threat for 2020 or the near-term thereafter, it would be wise to think about it if one is anticipating investing in long-term infrastructure solutions. Will quantum computing render the investment obsolete? Or, will quantum computing present a security threat to that infrastructure?  It is not too early to think about these issues, and for example, technologists have been hard at work developing quantum-proof blockchain protocols. It would at least be prudent to understand the long-term roadmap of technology suppliers to see if they have even thought about quantum computing, and if so, to see to how they see quantum computing impacting their solutions and services.

Artificial Intelligence

We have seen significant level of deployment in the Artificial Intelligence/Machine Learning landscape this past year.  According to the Artificial Intelligence Index Report 2019, AI adoption by organizations (of at least one function or business unit) is increasing globally. Many businesses across many industries are deploying some level of AI into their businesses.  However, the same report notes that many companies employing AI solutions might not be taking steps to mitigate the risks from AI, beyond cybersecurity. We have advised clients on those risks, and in certain cases have been able to apportion exposure amongst multiple parties involved in the implementation.  In addition, we have also seen the beginning of regulation in AI, such as California’s chatbot law, New York’s recent passage of a law (S.2302) prohibiting consumer reporting agencies and lenders from using the credit scores of people in a consumer’s social network to determine that individual’s credit worthiness, or the efforts of a number of regulators to regulate the use of AI in hiring decisions.

We expect 2020 to be a year of increased adoption of AI, coupled with an increasing sense of apprehension about the technology. There is a growing concern that AI and related technologies will continue to be “weaponized” in the coming year, as the public and the government express concern over “deepfakes” (including the use of voice deepfakes of CEOs to commit fraud).  And, of course, the warnings of people like Elon Musk and Bill Gates, as they discuss AI, cannot be ignored.

Blockchain

We have been very busy in 2019 helping clients learn about blockchain technologies, including issues related to smart contracts and cryptocurrency. 2019 was largely characterized by pilots, trials,  tests and other limited applications of blockchain in enterprise and infrastructure applications as well as a significant level of activity in tokenization of assets, cryptocurrency investments, and the building of businesses related to the trading and custody of digital assets. Our blog, www.blockchainandthelaw.io keeps readers abreast of key new developments and we hope our readers have found our published articles on blockchain and smart contracts helpful.

Looking ahead to 2020, regulators such as the SEC, FinCEN, IRS and CFTC are still watching the cryptocurrency space closely. Gone are the days of ill-fated “initial coin offerings” and today, security token offerings, made in compliance with the securities laws, are increasingly common. Regulators are beginning to be more receptive to cryptocurrency, as exemplified by the New York State Department of Financial Services revisiting of the oft-maligned “bitlicense” requirement in New York.

Beyond virtual currency, I believe some of the most exciting developments of blockchain solutions in 2020 will be in supply chain management and other infrastructure uses of blockchain. 2019 was characterized by experimentation and trial. We have seen many successes and some slower starts. In 2020, we expect to see an increase in adoption. Of course, the challenge for businesses is to really understand whether blockchain is an appropriate solution for the particular need. Contrary to some of the hype out there, blockchain is not the right fit for every technology need, and there are many circumstances where a traditional client-server model is the preferred approach. For help in evaluating whether blockchain is in fact a potential fit for a technology need, this article may be helpful.

Other 2020 Developments

Interestingly, one of the companies that has served as a form of leading indicator in the adoption of emerging technologies is Walmart.  Walmart was one of the first major companies to embrace supply use of blockchain, so what is Walmart looking at for 2020? A recent Wall Street Journal article discusses its interest and investment in 5G communications and edge computing. We too have been assisting clients in those areas, and expect them to be active areas of activity in 2020.

Edge computing, which is related to “fog” computing, which is, in turn,  related to cloud computing, is simply put, the idea of storing and processing information at the point of capture, rather than communicating that information to the cloud or a central data processing location for storage and processing. According to the WSJ article, Walmart plans on building edge computing capability for other businesses to hire (following to some degree Amazon’s model for AWS).  The article also talks about Walmart’s interest in 5G technology, which would work hand-in-hand with its edge computing network.

Our experience with clients suggest that Walmart may be onto something.  Edge and fog computing, 5G and the growth of the “Internet of Things” are converging and will offer the ability for businesses to be faster, cheaper and more profitable. Of course this convergence also will tie back to the issues we discussed earlier, such as data, privacy and data security, artificial intelligence and machine learning. In general, this convergence will increase even more the technical abilities to process and use data (which would conceivably require regulation that would feature privacy and data security protections that are consumer-friendly, yet balanced so they do not stifle the economic and technological benefits of 5G).

This past year has presented a host of fascinating technology-based legal issues, and 2020 promises to hold more of the same.  We will continue to keep you posted!

We hope you had a good 2019, and we want to wish all of our readers a very happy and safe holiday season and a great New Year!

© 2019 Proskauer Rose LLP.

For more in technology developments, see the National Law Review Intellectual Property or Communications, Media & Internet law sections.

Foreign Judgments in Israel: Recognition and Enforcement

As a basic rule in international law, a judgment rendered in one country is not recognized, per se, in another country in which its recognition is enforcement or recognition is sought. The foreign judgment must first undergo a process of integration, sometimes called ‘domestication,’ dictated by the laws of the integrating country before it can be recognized or enforced. The difference in status between a foreign and a local, or domestic, judgment necessitates this integration:[1]

“Where it exists, it is a sign that a local governmental organ – judicial or otherwise – has granted the foreign judgment an entry visa and has set the degree of its validity here according to the pertinent rules of the local law.” Justice Cheshin observed in C.A. 970/93 Attorney General of Israel v. Agam[2]:

Thus, for a foreign judgment to serve as, e.g., as a collateral estoppel in Israeli litigation, an Israeli court must first recognize, and thus integrate, the foreign judgment. Until this is done, the foreign judgment has no status in Israel, for the purpose of either recognition or enforcement. It can even be said that “a foreign judgment not yet declared enforceable holds the same status as mere pleadings.”[3]

General

A foreign judgment lacks validity, and must undergo a process of integration, before it can be recognized or enforced in Israel. Israeli law’s methods of integration are detailed in the Foreign Judgments Enforcement Law, 5718-1958 (Enforcement Law). This establishes a distinct normative framework on whose sole basis the courts in Israel may recognize a foreign judgment or declare it enforceable. The Enforcement Law establishes a series of conditions regarding the nature of the judgment, the manner of its execution, and its integration into Israeli law. Should these conditions be met, a court shall declare the judgment enforceable in Israel. Thus, inter alia, the Enforcement Law establishes conditions under which an Israeli court may declare a foreign judgment enforceable: the requirement of reciprocity of enforcement, according to which a foreign judgment would not be declared enforceable if the rendering country’s law does not enforce the judgments of Israeli courts; the time period during which a petition to enforce a foreign judgment must be filed for an Israeli court to considered it; defenses, any one of which would preclude the enforceability of the foreign judgment; and a restriction on enforcement, according to which a foreign judgment shall not be declared enforceable if its enforcement is likely to prejudice the sovereignty or security of the State of Israel.

The Enforcement Law (Article 11) also establishes conditions for recognizing a foreign judgment: “incidentally, while hearing another matter…and for the purpose of that matter”, or primarily and directly. It is significant that the original Enforcement Law, passed by the Knesset in 1958, dealt solely with incidental recognition of foreign judgments, while provisions for direct and primary recognition of foreign judgments were added later, in the Foreign Judgments Enforcement Law (Amendment 2) 5738-1977.

Although lack of good faith or unacceptable conduct do not, pursuant to the Enforcement Law, provide independent cause to refuse recognition or enforcement of a foreign judgment, “however certainly this carries weight in the court’s considerations together with all other conditions”[4] for such recognition or enforcement.

Judgments in Personam, in Rem, and Personal Status Judgments

The recognition or enforcement of a foreign judgment is highly influenced by the traditional classification of judgments into in personam, in rem, and personal status judgments. A judgment in personam obligates a person to perform an act (repay a debt, pay damages, surrender an object, etc.) or to refrain from doing so. A judgment in personam binds, in the sense of creating res judicata, only the parties involved, and by its very nature is given to execution, that is to say, enforcement. A judgment in rem declares or establishes (creates, changes, or cancels) title in immovable or movable property. Such a judgment binds the world, so to speak. It does not place any personal obligation and is therefore not given to execution. This is also true of quasi in rem judgments, which are applicable only to certain parties: for example, an inheritance order that declares certain individuals as heirs, and their resulting title in a certain property. A status judgment is a judgment that declares or establishes (creates, changes, or cancels) the personal status of a person, such as an annulment or a judgment of divorce. Like a judgment in rem, a personal status judgment is not given to execution, as it imposes no personal obligations.

Under the rules of private international law, personal status judgments can be issued by a court in the country of permanent residency or in the country of citizenship.[5] In general, however, there is no international consistency,[6] as personal status is limited to a particular country or a specific legal system. In a case where a Jewish couple, married in, e.g., New York in a civil ceremony, emigrates to Israel, they may be considered unmarried from the perspective of the Jewish law that applies in the Israeli State Rabbinical court. Yet, in the event of divorce, Israeli law may require them to accept a Rabbinic divorce. In some situations,[7] nonetheless, Israeli civil law may recognize the marriage, for example, regarding alimony.[8] A foreign divorce judgment is another example of a split status,[9] as it has no binding validity and lacks evidentiary value until validation from a competent Israeli court.

Another example is mamzerut, a status created by Jewish religious law that disqualifies the mamzer from Jewish marriage. In the Israeli legal system,[10] a mamzer is a child born of a married woman from another man, or a child of relations with a first-order relative, defined and prohibited in religious law. Within the state of Israel, qualification for marriage and divorce between Jews is set by Jewish law, a law that is not applicable in other countries. Therefore, a mamzer may other than in Israel. A parallel example, in certain countries, is a child born out of wedlock. In those countries, such a child is considered illegitimate, whereas in Jewish religious law, the status of a child born out of wedlock is not affected in any way.

Thus, only foreign judgments in personam can be enforced in Israel directly, while foreign in rem and personal status judgments are granted validity through their recognition. However, because all enforcement in and of itself includes recognition, it can be said that all types of judgments can potentially be recognized,[11] although for those judgments that cannot be enforced, the recognition per se is of nearly no value.

What options are available for a party seeking the enforcement, in Israel, of a foreign judgment? In general, the traditional means in English common law for enforcing a foreign debt judgment is by filing a domestic claim based on the foreign judgment. The foreign judgment itself, as opposed to the cause of action in the original forum, becomes the new cause of action. Claims based on foreign judgments were accepted in Palestine under the British Mandate. This expired in 1948 upon the establishment of the State of Israel. However, after enactment of the Enforcement Law, and particularly of its Article 2, it was no longer clear whether this procedure was still available to the holder of a foreign judgment.[12]

In C.A. 101/63 Winter v. Kovetz,[13] the Supreme Court dispersed any doubts, ruling unequivocally, that even given the Enforcement Law, a party might still file a claim in Israel on the basis of a foreign judgment, as opposed to filing a petition pursuant to the Enforcement Law to declare the judgment enforceable.[14] In C.A. 665/72 Mata Khan (Christophilco) v. Schweibel,[15] the Israeli Supreme Court again held that a foreign judgment creditor is permitted to “file a claim based on the original cause at the basis of the judgment, file a claim whose cause of action is the foreign judgment, or file a petition for enforcement in accordance with the enforcement law.”[16]

Enforcement proceedings for a foreign judgment are intended to grant the creditor, whose matter was already heard and adjudicated in a foreign state, tools of enforcement in the state occupied by the debtor or his property. In this way, the objectives behind the enforcement process are attained, including limiting litigation between the parties; honoring their rights; as well as encouraging cooperation and harmony between the various legal systems.

A result of the stated objectives of the enforcement process is that an Israeli court hearing a petition to enforce a foreign judgment does not act as an appellate court over the foreign court, and is inclined to “respect the judgment as is, and not question it.”[17] Thus also, “the court does not require a new, local investigation of the foreign court proceedings; does not examine the factual or legal correctness of the foreign judgment; and does not even take the reasoning of the judgment into account.”[18] Therefore, an error – even a blatant one – in the foreign judgment would not in and of itself preclude the judgment’s enforcement.

[1] Prof. Amos Shapira, Recognition and Enforcement of Foreign Judgments, Iyunei Mishpat 4 (1974) 509 (hereinafter: Shapira, Recognition and Enforcement of Foreign Judgments, or Shapira).

[2]P.D. 49(1) 561, 569 (1995).

[3]Bnk. (T.A.) 1515/04 Bamira v. Greenberg, at §4, (Nevo, Jul. 15, 2004).

[4] See Judge Keret-Meir’s ruling in Bankruptcy File (T.A.) 2193/08 First International Bank of Israel Ltd. v. Gold & Honey (1995) L.P. et al (Nevo, Oct. 30, 2008), §4.

[5] H.C. 36/50 Gottlieb v. Gottlieb P.D. 5 57, 64 (1950); C.A. 472/64 Inavi v. Attorney General of Israel P.D. 19(1) 645 (1965).

[6] Michael Corinaldi, Status, Family, and Succession Laws Between Religion And State 25-26 (2004).

[7]Avigdor Levontin, On Marriage and Divorce Abroad 7, 50-51, 67-68 (1957). See also Menashe Shawa, Personal Law in Israel 153-154, 681 (4th ed., 2001).

[8]C.A. 173/69 Becher v. Goldberg P.D. 23(2) 665 (1969).

[9]Shawa, supra n. 3 at 141-241. See also Menashe Shawa, Direct Recognition of Judgments in Israel, and Applicable Rules Kiryat Hamishpat 2 35 (2002).

[10]Corinaldi, supra n. 3 at 25-26.

[11]Shapira, Recognition and Enforcement of Foreign Judgments 513.

[12]Id. 515-516.

[13]P.D. 17 2032 (1963). See also Shapira, Recognition and Enforcement of Foreign Judgments 516 n. 28.

[14]Shapira, id.

[15]P.D. 27(1) 690 (1984).

[16]Id. at 694.

[17]C.A. 221/78 Ovadia v. Cohen P.D. 33(1) 293, 296 (1978).

[18]D.C.M. (Jm.) 4052/05 Wells Fargo Bank of Minnesota National Association v. Zimmering (Nevo, Dec. 31, 2007), Section 9 of the judgment.

Copyright © 2019 Carmon & Carmon

For more on international law, see the National Law Review Global Law page.

CCPA Notice of Collection – Are You Collecting Geolocation Data, But Do Not Know It?

Businesses subject to the California Consumer Privacy Act (“CCPA”) are working diligently to comply with the CCPA’s numerous mandates, although final regulatory guidance has yet to be issued. Many of these businesses are learning that AB25, passed in October, requires employees, applicants, and certain other California residents to be provided a notice of collection at least for the next 12 months. These businesses need to think about what must be included in these notices.

A Business Insider article explains that iPhones maintain a detailed list of every location the user of the phone frequents, including how long it took to get to that location, and how long the user stayed there. The article provides helpful information about where that information is stored on the phone, how the data can be deleted, and, perhaps more importantly, how to stop the tracking of that information. This information may be important for users, as well as companies that provide iPhones to their employees to use in connection with their work.

AB25 excepted natural persons acting as job applicants, employees, owners, directors, officers, medical staff members, and contractors of a CCPA-covered business from all of the CCPA protections except two: (i) providing them a notice of collection under Cal. Civ. Code Sec. 1798.100(b), and (ii) the right to bring a private civil action against a business in the event of a data breach caused by the business’s failure to maintain reasonable safeguards to protect personal information. The notice of collection must inform these persons as to the categories of personal information collected by the business and how those categories are used.

The CCPA’s definition of personal information includes eleven categories of personal information, one of which is geolocation data. As many businesses think about the categories of personal information they collect from employees, applicants, etc. for this purpose, geolocation may be the last thing that comes to mind. This is especially true for businesses with workforces that come into the office every day, and which do not have a business need to know where their employees are, such as transportation, logistics, and home health care businesses. But, they still may provide their workforce members a company-owned iPhone or other smart device with similar capabilities, although not realizing all of its capabilities or configurations.

As many who have gone through compliance with the General Data Protection Regulations in the European Union, the CCPA and other laws that may come after it in the U.S. will require businesses to think more carefully about the personal information they collect. They likely will find such information is being collected without their knowledge and not at their express direction, and they may have to communicate that collection (and use) to their employees.

Jackson Lewis P.C. © 2019

SECURE Act Brings About Significant Changes to IRAs

As we reach the end of 2019 and prepare to flip the calendar to 2020, Congress and the president have finally passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act. The act brings about significant changes to federal tax law impacting individuals and business owners alike. Here are some of the law’s most significant provisions:

Removes Some Stretch Distributions for Inherited IRAs

This is a long-expected change that significantly impacts what an IRA beneficiary receives upon the death of the account owner. Under current law, any traditional IRA account owner must begin taking required minimum distributions (RMDs) from the IRA upon reaching age 70½. If the account owner dies after that age, any funds remaining in the IRA at the owner’s death may be inherited, with the RMDs being paid out to the heir over his or her life expectancy in most cases. This stretch enabled a younger beneficiary to grow the inherited IRA substantially (and tax-free), sometimes over many decades.

As a result of the SECURE Act, most beneficiaries will be required to distribute the entirety of an inherited IRA over a 10-year period. The writing has been on the wall since 2014 when the Supreme Court declared that an inherited IRA in the hands a non-spouse beneficiary was not a retirement account in the bankruptcy context (Clark v. Rameker). However, RMDs payable to the following persons still qualify for the stretch:

  • Surviving spouse of an account owner
  • Person who is not more than 10 years younger than the account owner
  • Minor child of the account owner
  • Disabled person
  • Chronically ill person

These new RMD rules apply to retirement accounts whose owners die after December 31, 2019.

Increases RMD Ages

As noted above, under current law, any traditional IRA owner must begin taking RMDs upon reaching age 70½. Under the SECURE Act, this age has been raised to 72, providing for a slightly increased period of tax deferral as well as greater clarity given the lack of half-birthday celebrations.

Removes Age Limitations on Traditional IRA Contributions

Under current law, while an individual could contribute to a Roth IRA without any age restriction, contributions to a traditional IRA were disallowed upon attaining age 70½. As a result of the SECURE Act, any individual may continue contributing to a traditional IRA throughout his/her lifetime with no age restriction.

The benefit of the removal of the contribution age restriction is significantly muted when read in conjunction with the removal of the stretch distributions for non-spousal beneficiaries above. Nevertheless, the removal of age restrictions on contributions presents an attractive tax deferral opportunity for the septuagenarian wage earner with a younger spouse who is named as the IRA’s beneficiary.

Adds Penalty-Free Distributions for Birth of Child or Adoption

As a default rule, withdrawals from retirement accounts prior to age 59 1/2 are subject to income tax on the withdrawn amount plus a 10 percent penalty. The SECURE Act provides a specific carve-out from the penalty if the funds – up to $5,000 – are withdrawn in order to pay expenses associated with a qualified birth or adoption. You’ll still pay income tax on the funds withdrawn but only if they aren’t repaid.

Adds Qualified 529 Plan Expenditures

The Tax Cuts and Jobs Act signed into law back in December 2017 permitted 529 account funds to be used for the payment of K-12 education expenses on behalf of the account beneficiary. The SECURE Act further expands the list of permissible uses of 529 funds to include costs associated with registered apprenticeships and student loan repayments.

Unfortunately, Michigan residents are still in a strange limbo with regard to using 529 account funds to pay K-12 education expenses as Michigan has not amended state law in coordination with the change in federal law. As a result, while withdrawals from 529 accounts for K-12 education expenses are explicitly qualified withdrawals under federal tax law, they may or may not be qualified expenses under Michigan state law. This position is further complicated by the presence of the Blaine amendment in Michigan’s constitution requiring that no money be appropriated from the state treasury for the benefit of any religious sect. If the Michigan Department of Revenue determined that withdrawals for the payment of K-12 education expenses were not qualified, any income withdrawn from the 529 account would be subject to income tax as ordinary income along with a 10 percent penalty.

Enhances Small Employer Access to Retirement Plans

Congress previously authorized the creation of the SIMPLE (1996) and SEP (1978) IRAs in an effort to improve access to retirement accounts for small employers. In the SECURE Act, Congress acknowledged that those previous efforts produced some success but left room for improvement. The new law should increase the willingness of small employers to participate in pooled retirement plans by softening the impact for an employer when another employer in a pooled plan fails.

The act also increases the credit for plan start-up costs, which will make it more affordable for small businesses to set up retirement plans. The existing $500 credit is increased by changing its calculation from a flat dollar amount to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000.

The SECURE Act will bring about both opportunities and complications for individuals planning their own financial futures as well as employers seeking to maximize their attractiveness to potential employees.

© 2019 Varnum LLP

For more on retirement regulation, see the National Law Review Labor & Employment law page.

Apollo Settles Alleged Sanctions Violations: Aircraft Lessors Pay Attention

The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury has broad delegated authority to administer and enforce the sanctions laws and related sanctions programs of the United States. As a key component of its enforcement authority, OFAC may investigate “apparent violations” of sanctions laws and assess civil monetary penalties against violators pursuant to five statutes, including the Trading with the Enemy Act and the International Emergency Economic Powers Act.1

An “apparent violation” involves “conduct that constitutes an actual or possible violation of U.S. economic sanctions laws.”2 An OFAC investigation of an “apparent violation” may lead to one or more administrative actions, including a “no action” determination, a request for additional information, the issuance of a cautionary letter or finding of violation, the imposition of a civil monetary penalty and, in extreme cases, a criminal referral.3 Investigations of apparent violations by OFAC often lead to negotiated settlements where a final determination is not made as to whether a sanctions violation has actually occurred.4

Upon the conclusion of a proceeding that “results in the imposition of a civil penalty or an informal settlement” against or with an entity (as opposed to an individual), OFAC is required to make certain basic information available to the public.5 In addition, OFAC may release on a “case-by-case” basis “additional information” concerning the penalty proceeding,6 and it often does. Such additional information will sometimes include informal compliance guidance, cautionary reminders and best practices recommendations. Such information is routinely consumed by corporate compliance officers seeking fresh insight on ever-evolving compliance and enforcement trends, particularly in the context of proceedings relating to industries with which they are involved.

On November 7, 2019, OFAC released enforcement information that has caught the attention of the aircraft leasing community, particularly U.S. aircraft lessors and their owned or controlled Irish lessor subsidiaries.7 The matter involved a settlement by Apollo Aviation Group, LLC8 of its potential civil liability for apparent violations of OFAC’s Sudanese Sanctions Regulations (SSR) that existed in 2014–5.9 Although the amount of the settlement was relatively modest, the enforcement activity by OFAC in the proceeding has attracted scrutiny by aircraft lessors because, for the first time in recent memory, a U.S. aircraft lessor has paid a civil penalty to OFAC for alleged sanctions violations.

At the time of the apparent violations, Apollo was a U.S. aircraft lessor which became involved in two engine leasing transactions that came back to haunt it.

In the first transaction, Apollo leased two jet engines to a UAE lessee which subleased them to a Ukrainian airline with which it was apparently affiliated. The sublessee, in turn, installed both engines on an aircraft that it “wet leased”10 to Sudan Airways, which was on OFAC’s List of Specially Designated Nationals and Blocked Persons within the meaning of the “Government of Sudan.” Sudan Airways used the engines on flights to and from Sudan for approximately four months before they were returned to Apollo when the lease ended. Meanwhile, in a separate transaction, Apollo leased a third jet engine to the same UAE lessee, which subleased the engine to the same Ukrainian airline, which installed the engine on an aircraft that it also wet leased to Sudan Airways. Sudan Airways used the third engine on flights to and from Sudan until such time as Apollo discovered how it was being used and demanded that the engine be removed from the aircraft.

Both leases between Apollo and its UAE lessee contained restrictive covenants “prohibiting the lessee from maintaining, operating, flying, or transferring the engines to any countries subject to United States or United Nations sanctions.”11 Thus, by allowing the engines to be installed by its sublessee on aircraft that were eventually wetleased to Sudan Airways, and flown to and from Sudan during the country’s embargo, the lessee presumably breached the operating restrictions and covenants imposed by Apollo in the leases. Moreover, once Apollo learned that the first two engines had been used, and the third engine was being used, for the benefit of Sudan Airways, it demanded that the third engine be removed from the aircraft that the sub-lessee had wet-leased to Sudan Airways, and this was done.12

One might reasonably conclude from these facts that Apollo acted like a good corporate citizen. So what did Apollo do wrong from a sanctions compliance standpoint?

OFAC stated that Apollo may have violated section 538.201 of the SSR, which at the time “prohibited U.S. persons from dealing in any property or interests in property of the Government of Sudan,”13 as well as section 538.205 of the SSR, which at the time “prohibited the exportation or re-exportation, directly or indirectly, of goods, technology or services, from the United States or by U.S. persons to Sudan.”14

What are the takeaways and possible lessons to be drawn by aircraft lessors from this settlement based upon these alleged violations and the facts upon which they were based?

First, according to OFAC, Apollo did not “ensure” that the engines “were utilized in a manner that complied with OFAC’s regulations,” notwithstanding lease language that effectively required its lessee to comply.15 OFAC is clearly suggesting here that aircraft lessors have a duty to require sanctions compliance by their lessees. And, in view of the fact that many sanctions programs are enforced on a strict liability basis, OFAC’s comment that Apollo failed to “ensure” compliance by its lessee and sublessees makes sense. Apollo was not in a position to avoid civil liability by hiding behind the well-drafted language of its two leases. If a sanctions violation occurred for which Apollo was strictly liable, the mere fact that its lessee’s breach of the lease was the proximate cause of the violation would not provide a safe harbor.

As an example of Apollo’s alleged failure to “ensure” legal compliance, OFAC observed that Apollo did not obtain “U.S. law export compliance certificates from lessees and sublessees,”16 a comment which is somewhat puzzling. To our knowledge, there is nothing in the law requiring a lessor to obtain export compliance certificates, at least not in circumstances where an export or re-export license is not otherwise required in connection with the underlying lease transaction. Moreover, as a practical matter, it would be difficult, at best, for an aircraft lessor to force the direct delivery of certificates from a sublessee or sub-sub-lessee with whom it lacks privity of contract. In view of the foregoing, one assumes that OFAC was looking for Apollo to install procedures by which its lessee would self-report on a regular basis its own compliance (and compliance by downstream sublessees) with applicable export control laws and the relevant sanctions restrictions contained in the lease.

Second, OFAC found that Apollo “did not periodically monitor or otherwise verify its lessee’s and sublessee’s adherence to the lease provisions requiring compliance with U.S. sanctions laws during the life of the lease.”17 In this regard, OFAC observed that Apollo never learned how and where its engines were being used until after the first two engines were returned following lease expiration and a post-lease review of engine records, including “specific information regarding their use and destinations,” actually conducted.

In view of the foregoing, OFAC stressed the importance of “companies operating in high-risk industries to implement effective, thorough and on-going, risk-based compliance measures, especially when engaging in transactions concerning the aviation industry.”18 OFAC also reminded aircraft and engine lessors of its July 23, 2019, advisory warning of deceptive practices “employed by Iran with respect to aviation matters.”19 While the advisory focused on Iran, OFAC noted that “participants in the civil aviation industry should be aware that other jurisdictions subject to OFAC sanctions may engage in similar deception practices.”20 Thus, according to OFAC, companies operating internationally should implement Know Your Customer screening procedures and “compliance measures that extend beyond the point-of-sale and function throughout the entire business of lease period.”21

As a matter of best practices, aircraft lessors should implement risk-based sanctions compliance measures throughout the entirety of a lease period, and most do. Continuous KYC screening by lessors of their lessees and sublessees is a common compliance practice. Periodic reporting by lessees as to the use and destination of leased aircraft and engines appears to be a practice encouraged by OFAC.22 Lessors can also make it a regular internal practice to spot check the movement of their leased aircraft through such web-based platforms as Flight Tracker and Flight Aware. If implemented by lessors, such practices may enable early detection of nascent sanctions risks and violations by their lessees and sublessees.

Finally, OFAC reminded lessors that they “can mitigate sanctions risk by conducting risk assessments and exercising caution when doing business with entities that are affiliated with, or known to transact business with, OFAC-sanctioned persons or jurisdictions, or that otherwise pose high risks due to their joint ventures, affiliates, subsidiaries, customers, suppliers, geographic location, or the products and services they offer.” Such risk assessment is an integral part of the risk-based sanctions compliance program routinely encouraged by OFAC, as outlined in its Framework for OFAC Compliance Commitments on May 2, 2019.23 For aircraft and engine lessors, conducting pre-lease due diligence on the ownership and control of prospective lessees and sublessees, as well as the business they conduct, the markets they serve, the equipment they use and the aviation partners with whom they engage, are key to identifying and understanding the sanctions risks that a prospective business opportunity presents.

1 See U.S. Department of the Treasury, Office of Foreign Assets Control, Inflation Adjustment of Civil Monetary Penalties, Final Rule, 84 Fed. Reg. 27714, 27715 (June 14, 2019).

2 31 C.F.R. Part 501, Appendix A, Section I.A.

3 31 C.F.R. Part 501, Appendix A, Section II.

4 31 C.F.R. Part 501, Appendix A, Section V.C.

5 31 C.F.R. §501.805(d)(1). Such information includes “(A) [t]he name and address of the entity involved, (B) [t]he sanctions program involved, (C) A brief description of the violation or alleged violation, (D) [a] clear indication whether the proceeding resulted in an informal settlement or in the imposition of a penalty, (E) [a]n indication whether the entity voluntarily disclosed the violation or alleged violation to OFAC, and (F) [t]he amount of the penalty imposed or the amount of the agreed settlement.” Id. OFAC communicates all such information through its website. 31 C.F.R. § 501.805(d)(2).

6 31 C.F.R. § 501.805(d)(4).

7 See OFAC Resource Center, Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Apollo Aviation Group, LLC (Nov. 7, 2019) (https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Page…) (the Settlement Announcement).

8 In December 2018, Apollo was acquired by The Carlyle Group and currently operates as Carlyle Aviation Partners Ltd. According to the Settlement Announcement, neither The Carlyle Group nor its affiliated funds were involved in the apparent violations at issue. See id. at 1 n.1.

9 See 31 C.F.R. Part 538, Sudanese Sanctions Regulations (7-1-15 Edition). Note that most sanctions with respect to Sudan were effectively revoked by general license as of October 2, 2017, thereby authorizing transactions previously prohibited by the SSR during the time period of the apparent violations by Apollo. However, as is true when most sanctions programs are lifted, the general license issued in the SSR program did not “affect past, present of future OFAC enforcements or actions related to any apparent violations of the SSR relating to activities that occurred prior to the date of the general license.” Settlement Announcement at 1 n.2. See also OFAC FAQ 532 (https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#sudan_whole). 

10 A “wet lease” is “an aviation leasing arrangement whereby the lessor operates the aircraft on behalf of the lessee, with the lessor typically providing the crew, maintenance and insurance, as well as the aircraft itself.” See Settlement Announcement at 1 n.3.

11 Id. at 1.

12 Unfortunately, Apollo did not learn that the first two engines were used in violation of lease restrictions until they were returned following lease expiration and it conducted a post-lease review of the relevant engine records. 

13 The alleged application of section 538.201 to Apollo in the circumstances confirms the broad interpretive meaning that OFAC often ascribes to terms such as “interest,” “property,” “property interest” and “dealings,” which appear in many sanctions programs.

14 The alleged application of section 538.205 to Apollo in the circumstances suggests that a U.S. lessor of aircraft and jet engines may be tagged with the “re-export” of such goods and related services from one foreign country to another, notwithstanding the existence of a contractual daisy-chain of lessees, sub-lessees, and/or wetlessees that actually direct and control such flight decisions. In the context of U.S. export control laws, the Export Administration Regulations (EAR) define the term “re-export” to include the “actual shipment or transmission of an item subject to the EAR from one foreign country to another foreign country, including the sending or taking of an item to or from such countries in any manner.” 15 C.F.R. § 734.14(a)(1). Thus, for export control purposes, the flight of an aircraft subject to the EAR from one foreign county to another foreign country constitutes a “re-export” of the aircraft to that country. 

15 Settlement Announcement at 1.

16 Id.

17 Id., at 1–2.

18 Id. at 3. (emphasis added).

19 Id. See OFAC, Iran-Related Civil Aviation Industry Advisory (July 23, 2019) (https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20190723.aspx)

20 Id.

21 Id. (emphasis added).

22 In Apollo, OFAC reacted favorably to certain steps alleged to have been taken by Apollo to minimize the risk of the recurrence of similar conduct, including the implementation of procedures by which Apollo began “obtaining U.S. law export compliance certificates from lessees and sublessees.” Id.

23 See https://www.treasury.gov/resource-center/sanctions/Documents/framework_ofac_cc.pdf.

© 2019 Vedder Price

ARTICLE BY John E. Bradley of Vedder Price.
More sanctions actions on the National Law Review Antitrust & Trade Regulation law page.