Category: Utilities

Preparing For the Return of Dealer Distress

Over the last five years, auto and equipment dealers experienced a period of low inventory levels with high margins on the limited inventory they had for sale and lease. Used automotive and equipment wholesale and retail prices surged. At the same time, merger and acquisition activity drove dealer valuations to record highs especially in the automotive segment.

Dealer merger and acquisition activity has started to cool even though valuations and activity remain elevated above pre-pandemic levels1. New automotive inventory levels have risen during 2024 to the point that Ford’s CFO, John Lawler, expressed worry regarding rising new car inventory levels in June2. Used automotive and equipment wholesale prices have declined from their pandemic era highs as well.

Record profits, low inventory levels, and strong merger and acquisition activity led to low delinquency and default levels in the dealer lending space, but current trends indicate those days may be coming to an end. For floor plan lenders, they should be thinking about dealer distress happening again. While times are still good, there are some steps lenders can take to prepare for distress down the road.

Review Your Documents and Security Interests

It is always easier to fix documentation and security interest deficiencies when times are good. Lenders should be checking to make sure their loan documents are correct and most importantly, their security interest position reflects their expectations. One area of particular concern is making sure no other parties have filed security interests against the dealer including merchant cash advance, factoring and other “short term” funding sources that might not show up as debt on financial statements. Even other lenders providing longer term debt financing secured by other assets like real estate may be taking a security interest in your inventory as well.

Insurance

As part of your documentation review, you should verify the dealer’s insurance meets the requirements of your loan documents, lists your interest properly, and is adequate for the dealer’s exposure. Insurance coverage tied to inventory levels can become insufficient if inventory levels rise faster than the coverage limits increase. Also ensuring the insurance covers all collateral locations is a requirement that might slip through the cracks especially if collateral locations change frequently.

Where is Your Collateral?

One benefit of low inventory levels was that dealers stopped storing inventory at satellite lots. The practice of old is starting to return as inventory levels build. Lenders want to make sure they know of these locations (they should if they are on top of the audits) and obtain landlord waivers if necessary to access the inventory upon a default.

Keeping Up on Audits

Anyone who knows the floor plan business knows the importance of audits. Low inventory levels and well performing dealers made audits easy. With increasing inventory levels, audit complexity is returning to pre-pandemic norms. Audit issues are often one of the first signs of dealer distress. A prominent example of a dealer issue recently being unearthed through audits involves a boat dealer who allegedly sold boats, but stored them for the customers and alleged the boats were still for sale3.

Financial Reporting and Covenants

Financial reporting deficiencies and financial covenant violations are also warning signs of potential distress on the horizon. Dealers rarely go bad overnight. Financial reporting and covenants going downhill are an obvious warning sign.

Taxes

Not just limited to dealers, but tax delinquencies are always a big red flag. Confirming the payment of taxes and the existence of no tax liens should be part of reviewing any dealer relationship especially one showing other signs of distress.

Used Inventory Levels and Advance Rates

During the pandemic when used vehicle and equipment prices shot through the roof, lenders became permissive of advancing beyond their standard advance rates. As used inventory values decline for vehicles4 and agricultural equipment5, dealers can be underwater on used inventory.

Manufacturer Specific Issues

Not all dealers are equal and the same is true for manufacturers. Monthly inventory level data from Cox Automotive6 shows inventory levels being substantially higher among some vehicle brands compared to others. Keeping an eye on your dealer and the average inventory levels of the brands they carry should be on your radar.

Explaining What You Do

As someone who spent a decade as lead counsel at two different financial institutions being lead counsel for floor plan businesses, I spent a lot of time explaining to others outside the floor plan businesses the nuances of floor plan lending. If things start going downhill with a dealer, be prepared for the inevitable basic questions from those not used to the dealer business.

Conclusion – Hope for the Best, Prepare For The Worst

One of the best credit people I ever worked with described a dealer failure as like a war. When a dealer failure occurs, most likely through a selling inventory out of trust, you don’t have time to learn what to do. You got to know what to do. You must have someone ready to take command and quarterback the response. You got to know who will help you accomplish your ends. If you don’t act quickly, your inventory will be gone and your losses can be in the millions within days.

1 “Dealership Buy-Sell Activity and Blue Sky Values are declining, but are elevated well above pre-pandemic levels”, The Haig Report, August 29, 2024 (2024-Q2-Haig-Report-Press-Release-FINAL.pdf (haigpartners.com))
2 “Ford CFO says growing dealer inventory ‘worries me’”, Breana Noble, The Detroit News, June 11, 2024 (Ford CFO John Lawler says growing dealer inventory ‘worries me’ (detroitnews.com))
3 “Lender Alleges Dealer Diverted Millions in Sales Proceeds”, Kim Kavin, Soundings Trade Only, April 16, 2024 (https://www.tradeonlytoday.com/manufacturers/lender-alleges-dealer-diverted-millions-in-sales-proceeds)
4 “Wholesale Used-Vehicle Prices Decrease in First Half of September”, Cox Automotive, September 17, 2024 (Wholesale Used-Vehicle Prices Decrease in First Half of September – Cox Automotive Inc. (coxautoinc.com))
5 “Lower Used Equipment Prices Are Another Sign of the Challenges in the Ag Sector”, Jim Wiesenmeyer, Farm Journal, August 14, 2024 (Lower Used Equipment Prices Are Another Sign of the Challenges in the Ag Sector | AgWeb).
6 “New-Vehicle Inventory Stabilizes as Sales Incentives Increase and Model Year 2025 Vehicles Arrive”, Cox Automotive, September 19, 2024 (New-Vehicle Inventory Stabilizes as Sales Incentives Increase and Model Year 2025 Vehicles Arrive – Cox Automotive Inc. (coxautoinc.com))

Copyright © 2024 Womble Bond Dickinson (US) LLP All Rights Reserved.
For more on Dealers, visit the NLR Utilities Transport section

Federal Court Directed to Rule on Challenge to WV Pooling Statute

A federal appeals court has instructed a lower court to resolve a pending suit challenging the constitutionality of West Virginia’s oil and gas pooling and unitization law. The federal district court previously declined to resolve certain constitutional issues presented in the suit on the grounds that those issues should be decided by a state court instead of a federal court.

In 2022, the West Virginia Legislature enacted Senate Bill 694 to revise West Virginia law governing the pooling and unitization of oil and gas formations associated with horizontal well development. Pooling and unitization essentially involves combining separately owned properties into a single “unit” through which one or more horizontal wells are drilled. The oil and gas produced from the horizontal well is then allocated among all the properties in the unit for purposes of calculating production royalties payable to the mineral owners.

Prior to Senate Bill 694 becoming effective on June 7, 2022, formation of a pooled unit for a horizontal well drilled through “shallow” oil and gas formations, which includes the Marcellus Shale, required consent of 100% of the mineral owners for all the properties to be included in the unit. This 100% consent requirement did not apply to horizontal wells drilled through “deep formations” such as the Utica Shale. One of the more significant changes made by SB 694 was to allow the West Virginia Oil and Gas Conservation Commission to approve units for shallow formations where at least 75% of the mineral owners consent, provided other requirements are also satisfied. This means that up to 25% of a unit could potentially include properties for which the mineral owner did not consent to being part of a unit.

Before Senate Bill 694 became effective, a pair of mineral owners (Scott Sonda and Brian Corwin) filed a lawsuit in the federal District Court for the Northern District of West Virginia seeking to preclude the law from taking effect. Governor Jim Justice was the only defendant named in the case. In their suit, Sonda and Corwin alleged that the law was illegal for several reasons, including the claim that the law authorizes the unconstitutional taking of private property without just compensation and deprives landowners of due process of law.

Federal Judge John Preston Bailey initially dismissed all of their claims for two reasons. First, Judge Bailey concluded that Sonda and Corwin lacked standing to bring the challenge because (a) their property had not been pooled into a unit without their consent and no operator had sought approval of a unit to include their property without their consent; and (b) the Commission, not the Governor, has the power to directly enforce Senate Bill 694.

Second, Judge Bailey ruled that, even if Sonda and Corwin established standing, Governor Justice had constitutional immunity from the suit because he had no direct authority to implement Senate Bill 694. Rather, the Commission has the authority to implement the law.

Instead of dismissing their suit entirely, Judge Bailey granted leave for Sonda and Corwin to amend their complaint to name the Commission as a defendant instead. Sonda and Corwin did so, and also named as defendants each person who serves on the Commission. The amended complaint still does not allege that mineral properties owned by Sonda or Corwin were pooled into a unit without their consent. Instead, the amended complaint attempts to address the standing issue by alleging that Senate Bill 694 effectively eliminates their ability to challenge whether they are being fairly compensated for oil and gas produced from their property that was pooled into a unit with their consent.

The Commission moved to dismiss the amended complaint for various reasons, including Sonda’s and Corwin’s lack of standing to bring the case. Judge Bailey did not address the standing issue, but agreed with the Commission with respect to three of the five claims asserted by Sonda and Corwin. Judge Bailey then abstained from addressing the Commission’s arguments for dismissal of the other two claims, which asserted constitutional violations, because he believed that those issues were more appropriate for resolution by a state court instead of a federal court.

The Commission appealed Judge Bailey’s decision to abstain from addressing the arguments for dismissal of the constitutional claims. By opinion issued on January 31, 2024, the Fourth Circuit Court of Appeals ruled that Judge Bailey should not have abstained. The appellate court also directed Judge Bailey to first address the standing issue before addressing any other pending issue. The opinion does not specify a deadline for Judge Bailey to rule on those issues. If Judge Bailey finds that Sonda and Corwin continue to lack standing to assert their claims, the case will presumably be dismissed on that ground alone. If Judge Bailey concludes that Sonda and Corwin have established standing, Judge Bailey will likely address the merits of the Commission’s other arguments for dismissal.

© Copyright Babst, Calland, Clements and Zomnir, P.C.
For more news on the Constitutionality of West Virginia’s Oil and Gas Laws, visit the NLR Election Law / Legislative News section.

Taking Stock of a Big Month for Methane Policy

November has been a big month for methane policy, featuring announcements of new international, domestic, and private sector initiatives.  A common thread across all of the new initiatives is the aim of achieving more ambitious, credible, and internationally consistent standards for measurement, monitoring, reporting, and verification (MMRV) of methane emissions from the oil and gas sector.  Below is a review.

China’s Methane Pledge.  China is the world’s largest emitter of methane, accounting for 14% of the global total, and, for the first time, the government made an international announcement about methane policy.  At a November summit held in Sunnylands, California, President Joe Biden and Chinese President Xi Jinping announced a new agreement to address climate change. Previous Chinese pledges had only targeted carbon dioxide, but the new agreement includes a first-ever commitment by the country to tackle non-CO2 emissions, including methane.  Just prior to the Sunnylands summit, the Chinese government issued an action plan outlining goals to curb flaring and to develop a methane MMRV program.

EU Methane Regulation.  The European Union (EU) also broke new ground on methane policy this month.  After all-night talks, the EU’s governing entities finalized a new Methane Regulation, which targets not only domestic sources of methane but also emissions attributable to imports of natural gas into the Continent—including from the United States. For imports, the Regulation establishes phased requirements.  The first phase focuses on data collection coupled with a mechanism for detecting and rapidly addressing large leaks.  The second phase will condition imports on application of prescribed, uniform MMRV measures.  Starting in 2030, importers will be subject to a limit on their methane “intensity”—a metric that measures methane emissions per unit of gas throughput.  The methane intensity limit will apply across the entire value chain, from pre-production through final delivery.  The Regulation requires the EU Commission to promulgate the intensity standard by 2027.

International Working Group on MMRV for Natural Gas Markets.  To support not only these emerging governmental policies but also expanding private sector efforts to create a market for “Differentiated Gas,” a multilateral initiative was announced in November—the International Working Group to Establish a Greenhouse Gas Supply Chain Emissions Measurement, Monitoring, Reporting, and Verification (MMRV) Framework for Providing Comparable and Reliable Information to Natural Gas Market Participants (the Working Group). The Working Group’s members consist of the U.S. government, eleven other governments, the European Commission, and the Mediterranean Gas Forum.  The Working Group’s objective is to develop a consensus-based, consistent international framework for supply chain MMRV.  A consistent framework will make it easier for buyers to demand and suppliers to provide natural gas with a lower greenhouse gas profile.  The Working Group will not prescribe emission targets, but it acknowledges that governments may use its work products to inform regulatory processes.

The Working Group has stated that it will draw on input from expert stakeholders.  To that end, a consortium of three universities participating in the Energy Emissions Modeling and Data Lab (EEMDL) has convened a group of academic, think tanks, ENGO, and market experts to develop recommendations for MMRV standards for the Differentiated Gas market. (I am a participating expert in the EEMDL initiative.)  This month, a subset of the experts group published a paper in Nature Energy outlining the issues.

Financial Institutions Call for Industry Action.  Underscoring the increasing private sector demand for Differentiated Gas, two major financial institutions released reports in November calling for industry action.  JP Morgan, one of the world’s largest financiers of fossil fuel projects, issued a report underscoring its commitment to achieve a net zero-aligned emission intensity reduction target for its oil and gas sector portfolio. Methane reductions are a key element of its net-zero strategy.  To that end, the report identifies and exhorts the industry to adopt best-in-class practices for methane MMRV and mitigation.

In the same week, one of the world’s largest insurance underwriters for the oil and gas sector, Chubb, rolled out a Methane Resource Hub, a digital resource center for its clients. The site provides information on MMRV and mitigation techniques, technologies, studies, and policies.

Waiting for EPA.  Also expected in November is EPA’s proposed implementation rules for the “Methane Fee” that was enacted as part of the Inflation Reduction Act (IRA).  The IRA provisions apply a per-ton fee to facilities in the oil and gas sector that exceed specified methane intensity limits.  To implement the fee, EPA will need to promulgate methods for facility-level methane intensity measurements.  A significant issue in the rulemaking is the extent to which EPA will allow affected facilities to use advanced methane measurement technologies to calculate their annual emissions.

© 2023 Van Ness Feldman LLP
For more news on methane policy, visit the NLR Environmental, Energy & Resources section.

Exporting U.S. Antitrust Law: Are We Really Ready for NOPEC?

The year is 1979. Inflation and lines at the gas pumps caused by a revolution in Iran have stunned Americans. Driven to action, the International Association of Machinists (IAM) files suit in the Central District of California against OPEC and its 14 member countries for participating in a cartel that controls the worldwide price of oil. None of the defendants made any kind of appearance before the court. Nonetheless, the union lost, and its case was dismissed.

Under the Constitution, federal courts are courts of limited jurisdiction. A district court has no power to decide a case over which it has no subject matter jurisdiction. The requirement cannot be waived or avoided; a court that lacks subject matter jurisdiction has no legal authority to entertain the matter. A federal statute known as the Foreign Sovereign Immunity Act of 1976 (FSIA) limits the court’s jurisdiction in cases involving foreign sovereigns and, subject to a few specific exceptions, grants foreign states immunity from the jurisdiction of U.S. courts. The court in IAM v. OPEC raised the FSIA on its own (there being no defendants present) and, finding the OPEC states immune (OPEC itself could not be served), dismissed the case. Thusly did the IAM lose its antitrust case against defendants who never even showed up in court.

The judiciary has resisted the innumerable attempts since 1979 to hold the OPEC cartel accountable for violating U.S. antitrust laws, even though the court’s IAM decision has proven erroneous. Acts by a sovereign “based upon a commercial activity” in the U.S., or affecting U.S. commerce, do not enjoy immunity under FSIA. Although the district court in IAM didn’t think so, the Ninth Circuit on appeal made clear that pricing of oil on world markets is indeed commercial activity that affects the U.S. economy and, therefore, not entitled to sovereign immunity. But the Appeals Court nonetheless sidestepped the case, taking refuge in the judge-made Act-of-State doctrine. The doctrine is prudential, as opposed to jurisdictional, and amounts to a voluntary renunciation of jurisdiction by a court when its decision could interfere with the conduct of foreign policy by the executive branch. Indeed, it is easy to see how a suit against the members of OPEC for price fixing might intrude into a sensitive foreign policy area.

In the four decades since IAM, these considerations have obstructed U.S. courts from holding OPEC accountable for a cartel formed for the purpose of and with the effect of stabilizing the price of a commodity in interstate or foreign commerce, which is illegal per se. As recently as 2010, the Obama administration urged the Fifth Circuit to dismiss an antitrust suit brought by private plaintiffs on Act-of-State grounds, it being up to the executive branch and not the courts to conduct foreign policy and protect national security interests.

Since 2000, when the first No Oil Producing and Exporting Cartels (NOPEC) Act was introduced in the House, the same legislation has been introduced no less than four times. NOPEC came closest to passage in 2007, when different versions of the bill passed the House and the Senate but were not reconciled. The House and Senate judiciary committees have now both approved the bill, and the latest version is on the Senate’s legislative calendar. Congress could act quickly if there is bipartisan support, otherwise it will take several months and require reintroduction in 2023.

NOPEC consists of three operative parts.

  • First, it would amend the Sherman Antitrust Act by adding a new Section 7(a) that explicitly makes it illegal for any foreign state to act collectively with others to limit production, fix prices, or otherwise restrain trade with respect to oil, natural gas, or other petroleum products. Judicial enforcement and a remedy would be available only to the Department of Justice, so the bill does not create a private right of action.

  • Second, it would amend FSIA to explicitly grant jurisdiction to U.S. court against foreign sovereigns to the extent they are engaged in a violation of the new Section 7(a).

  • Third, the legislation clarifies that the Act-of-State doctrine does not prevent U.S. courts from deciding antitrust cases against sovereigns alleged to have violated the new Section 7(a).

Calls for taking a harder line against OPEC are growing stronger in light of recent actions taken by the cartel. In May, for example, Saudi Arabia and 10 other OPEC members voted to slash oil production – resulting in high gas prices – as the U.S. and other nations imposed embargoes on Russian oil. OPEC’s production cuts provided Russia with a substantial lifeline in its increasingly difficult, costly, and prolonged invasion of Ukraine.

The Senate bill is sponsored by ​​Senate Judiciary Committee Ranking Member Chuck Grassley and cosponsors Sens. Amy Klobuchar (D-MN) Mike Lee (R-UT), and Patrick Leahy (D-VT), who argue that OPEC’s price-fixing goes directly against the idea of fair and open markets, with current laws leaving the U.S. government “powerless” over OPEC. But are we really ready for NOPEC?

The concern over interference with foreign policy is far from trivial.

The American Petroleum Institute (API) recently sent a letter to Congress opposing the NOPEC bill, stating it would harm U.S. military, diplomatic, and business relations. API President and CEO Mike Sommers warned that while NOPEC is a noble endeavor designed to protect consumers, it would open the U.S. up to reciprocal lawsuits by foreign entities, writing that this could devastate certain political relations and trigger retaliation from OPEC countries. Other NOPEC critics say OPEC countries may limit other business dealings with the U.S., including lucrative arms deals or by pulling in their investments, as Saudi Arabia threatened to do in 2007, when the Deputy Saudi Oil Minister said the country would pull out of a multi-billion Texas oil refinery project unless the DOJ filed a statement of interest urging dismissal of an antitrust case then pending in the U.S. courts. In 2019, Saudi Arabia and OPEC threatened to start selling their oil in currencies other than the dollar, which would weaken the dollar’s position as the global vehicle currency.

For these reasons, it’s not clear what the White House would do if NOPEC passes. The Biden administration’s view of the measure seems to have shifted a bit, but it hasn’t come out strongly one way or the other. This is hardly surprising given the delicate and complex nature of the issue, the ongoing impact of Russia’s war on Ukraine, and the great importance voters place on the price of gas. Then-Press Secretary Jen Psaki said on May 5, 2022, that the “potential implications and unintended consequences of this legislation require further study and deliberation.” More recently, National Security Advisor Jake Sullivan and Brian Deese, President Biden’s Director of the National Economic Council, said that nothing is off of the table – that the administration is assessing the situation and inviting recommendations. On Oct. 5 the Department of Energy said it would release another 10 million barrels of oil from the Strategic Petroleum Reserve. In making that announcement, Sullivan and Deese said the administration will consult with Congress on “additional tools and authorities to reduce OPEC’s control over energy prices.” They also reiterated the importance of investing in clean American-made energy to reduce reliance on foreign fossil fuels.

OPEC has such tremendous sway over U.S. gas prices and national security it is no wonder Congress continues to try to do something to free U.S. from OPEC’s whims and hold it accountable for going against the ideals of free markets. But whether NOPEC is the right approach remains an open question.

The antitrust laws represent a national ideological perspective on the most beneficial way to organize an economy. Policy differences between nations are supposed to occur in the diplomatic arena, not in the courts of one country or another. And if OPEC or its members lose an antitrust case in a U.S. court, how will the court enforce its judgment?

Article By Jonathan Rubin of MoginRubin

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

© MoginRubin LLP

Supreme Court Questions Whether Highly Compensated Oil Rig Worker Is Overtime Exempt

On October 12, 2022, the Supreme Court of the United States heard oral arguments in a case regarding whether an oil rig worker who performed supervisory duties and was paid more than $200,000 per year on a day rate basis is exempt from the overtime requirements of the Fair Labor Standards Act (FLSA).

The case is especially significant for employers that pay exempt employees on a day rate. It could have a major impact on the oil and gas industry in the way that it recruits, staffs, and compensates employees who work on offshore oil rigs and at remote oil and gas work sites. In addition, depending on how the Supreme Court rules, its decision could have much broader implications.

During the arguments in Helix Energy Solutions Group, Inc. v. Hewitt, the justices questioned whether, despite the employee’s high earnings, he was eligible for overtime compensation because he was paid by the day and not on a weekly salary basis. There is no express statutory requirement that an employee be paid on a “salary basis” to be exempt from overtime requirements, but such a requirement has long been included in the regulations issued by the U.S. Department of Labor (DOL) applicable to the FLSA’s white-collar exemptions. Notably, Justice Brett Kavanaugh suggested during the arguments that the regulations may be in conflict with the text of FLSA, although Helix did not raise this issue in its petition for certiorari.

Background

The case involves an oil rig “toolpusher,” an oilfield term for a rig or worksite supervisor, who managed twelve to fourteen other employees, was paid a daily rate of $963, and earned more than $200,000 annually. Between December 2014 and August 2017, when Michael Hewitt was discharged for performance reasons, he worked twenty-eight-day “hitches” on an offshore oil rig where he would work twelve-hour shifts each day, sometimes working eighty-four hours in a week. After his discharge, Hewitt filed suit alleging that he was improperly classified as exempt and therefore was entitled to overtime pay. The district court ruled in favor of Helix.

In September 2021, a divided (12-6) en banc panel of the U.S. Court of Appeals for the Fifth Circuit held that Hewitt was not exempt from the FLSA because his payment on a day-rate basis did “not constitute payment on a salary basis” for purposes of the highly compensated employee (HCE) exemption that is found in the FLSA regulations.

The Fifth Circuit further concluded that the employer’s day-rate pay plan did not qualify as the equivalent of payment on a salary basis under another FLSA regulation because the guaranteed pay for any workweek did not have “a reasonable relationship” to the total income earned. In other words, the court found that the employee was not exempt because the $963 he earned per day was not reasonably related to the $3,846 the employee earned on average each week.

Oral Arguments

Oral arguments at the Supreme Court focused on the interplay between the DOL’s HCE regulation, 29 C.F.R. § 541.601, and another DOL regulation, 29 C.F.R. § 541.604(b), which states that an employer will not violate the salary basis requirement under certain limited circumstances even if the employee’s earnings are computed on an hourly, daily, or shift basis.

At the time of Hewitt’s employment, the HCE exemption required an employee to be paid at least $455 per week on a “salary or fee basis” and to earn at least $100,000 in total annual compensation. Those threshold amounts have since been increased to $684 per week and $107,432 per year.

The other regulation, 29 C.F.R. § 541.604(b), states that an employee whose earnings are “computed on an hourly, a daily or a shift basis” may still be classified as exempt if the “employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily, or shift rate for the employee’s normal scheduled workweek.”

Hewitt earned double the minimum total compensation level for the HCE exemption. Since the minimum salary level for the exemption was only $455 per week, and Hewitt was guaranteed that he would be paid at least $963 per week for each week he worked at least one day, Helix argued that he was exempt from the FLSA’s overtime requirements because the HCE exemption was completely self-contained and to be applied without regard to other regulations, including the “salary basis” test and the minimum guarantee regulation. Hewitt argued that the HCE exemption required compliance with either the “salary basis” test or the minimum guarantee regulation since he was admittedly paid on a day rate basis.

However, Justice Ketanji Brown Jackson suggested that it was not that simple. Justice Jackson said the question of salary basis is more about the “predictability and regularity of the payment” for each workweek. “What he has to know is how much is coming in at a regular clip so that he can get a babysitter, so that he can hire a nanny, so that he can pay his mortgage,” Justice Jackson stated. Justice Jackson echoed the language of the salary basis test requiring that an exempt employee be paid a predetermined amount for any week in which she performed any work.

Similarly, Justice Sonia Sotomayor asked Helix, “so what you’re asking us to do is take an hourly wage earner and take them out of 604, which is the only provision that deals with someone who’s not paid on a salary basis.” Justice Sotomayor additionally raised the FLSA’s goal of “preventing overwork and the dangers of overwork.”

In contrast, Justice Clarence Thomas suggested that Hewitt’s high annual compensation relative to the average worker is a strong indication that he was paid on a salary basis and should be exempt. “The difficulty is just, for the average person looking at it, when someone makes over $200,000 a year, they normally think of that as an indication that it’s a salary,” Justice Thomas stated.

Justice Kavanaugh asked if the issue of whether the DOL regulations conflict with the FLSA is being litigated in the courts. He said, “it seems a pretty easy argument to say, oh, by the way, or maybe, oh, let’s start with the fact that the regs [sic] are inconsistent with the statute and the regs [sic] are, therefore, just invalid across the board to the extent they refer to salary.” He further stated, “if the statutory argument is not here, I’m sure someone’s going to raise it because it’s strong.”

Key Takeaways

It is difficult to predict how the Supreme Court will rule in this case. A decision that requires strict adherence to the regulation’s reasonable relationship test, even when the minimum daily pay far exceeds the minimum weekly salary threshold, would have a significant negative impact on the manner in which certain industries compensate their workers. It also could lead to even more litigation by highly compensated employees, many of whom make more money without receiving overtime pay than what many people who currently are paid overtime compensation make.

Depending upon its breadth, a decision that the regulations are in conflict with the statutory text of the FLSA could provide a roadmap for additional challenges to other parts of the regulations. This could have a wide-ranging impact, as the DOL currently is in the process of preparing a proposal to revise its FLSA regulations. Then again, if a future litigant takes up Justice Kavanaugh’s invitation to challenge whether the salary regulations are overbroad compared to the language of the FLSA, the current effort to revise the regulations regarding exemptions for executive, administrative, and professional employees may be moot.

Article By Andrew P. Burnside, Steven F. Pockrass, and Zachary V. Zagger of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

For more supreme court and litigation legal news, click here to visit the National Law Review.

© 2022, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

One Less Way for Ohio Landowners to Challenge Royalty Severances

On February 15, 2022, the Ohio Supreme Court issued a significant decision in Peppertree Farms, L.L.C. v. Thonen establishing that, unless expressly stated otherwise, an oil and gas royalty interest retained in a deed executed prior to 1925 is not limited to the lifetime of the grantor. In so holding, the Ohio Supreme Court cut off one of the only grounds, other than the Dormant Minerals Act and Marketable Title Act, for landowners to quiet title and eliminate past oil and gas severances.

Ohio follows a legal tradition under which the default rules of English “common law” were adopted and then adapted by statute to form the basis of our legal system. At common law, a conveyance of real property had to include “words of inheritance” (i.e., an express statement that the royalty interest would last in perpetuity and be inheritable) or the interest being conveyed would be limited to the lifetime of the grantee (a life estate). Additional complications arose when a grantor sought to retain an interest by deed. If the grantor was retaining a right which had already been conveyed to him in perpetuity, then the retention qualified as a “technical exception” of a pre-existing right and additional words of inheritance were not required. However, if the grantor was creating and then retaining a new right, the retention qualified as a “technical reservation” and was limited to a life estate.

As new modes of production and corresponding property rights were discovered, it became unclear exactly what rights pre-existed a severance and the whole system of distinctions fell apart. In 1925, the General Assembly passed a law establishing that all future conveyances of real property were presumed perpetual unless stated otherwise. While eliminating this issue as to future deeds, the General Assembly did not settle the issue as to deeds executed before 1925 or clarify whether the retention of an oil and gas royalty was a “technical exception” or “technical reservation.”

In the Peppertree Farms case, Plaintiffs Peppertree Farms, Jay Moore and Amy Moore (collectively, “Peppertree”) sought to quiet title to certain lands in Monroe County, Ohio, against a severed oil and gas royalty interest (the “Royalty Interest”) originally retained by the grantor under a 1921 deed. In addition to a claim for extinguished under Ohio’s Marketable Title Act, Peppertree asserted that the Royalty Interest did not include words of inheritance and was therefore a newly created right which terminated upon the death of the grantor under the 1921 deed. Conversely, the defendant royalty owners (“Royalty Owners”) argued that the Royalty Interest was a pre-existing right which the grantor already held, and therefore could retain, in perpetuity without words of inheritance.

While Peppertree was able to convince both the trial and appellate court that the Royalty Interest was a newly created interest which was limited to a life estate, it was unsuccessful with the Ohio Supreme Court. Reasoning that a royalty was nothing more than the retention of part of the right to receive the proceeds of oil and gas production, the Court ultimately found that the Royalty Interest was a “technical exception” which survived the lifetime of the grantor. As a result, Peppertree was limited to its claims for extinguishment under the Marketable Title Act and Ohio surface owners lost another means to challenge ancient royalty reservations.

©2022 Roetzel & Andress
For more articles on local state litigation, visit the NLR Litigation section.

Vehicle Inventory Historically Low

There can be many impediments to buying a new vehicle. COVID has certainly created a wide variety of barriers to the manufacturing and sale of a new vehicle.  Supply chain disruptions and distressed supplies, emergency orders inhibiting the ability to meet in person, not to mention the general recession across the United States and the world.  Add a new one for the industry to deal with: low inventory.

Yes, vehicle inventory has dropped to historic lows. Inventory of new cars dropped as low as a 62 day supply this summer.  This is well below the mark of 79 days from July 2019. Some large OEMs had inventory supply of below 40 days. When COVID hit in March, dealers had 3.4 million vehicles in inventory.  Now, that number is down to 2.2 million. This is kept sales rolling and led to some profitable months for dealers and the industry.

Not surprisingly, truck inventory pulled those averages down. Also not surprisingly, as inventory dropped, prices rose (recall your supply/demand economics classes). Low inventory does not just mean less vehicles to sell, but less variation of those vehicles is available. Most people can think of their top five items that they want in a new car, but those top five items are not always the same. This means that even if  a consumer wants to buy a vehicle, they may not be able to buy what they want. “It’s not only an issue of do we have enough overall inventory, but do we have the right inventory,” Charlie Chesbrough, senior economist for Cox, said on a call discussing Cox’s auto sales forecast.

And, it is October. Dealers should be striking deals to get 2020 models off the lot and makes space for 2021 models.  2021 models may not actually show up until 2021.  That is unheard of. With the 2021 model year part of an ongoing transition in the industry – multiple transitions – it might be the shortest, least interesting model year in decades. There are transitions to power trains (electric), transitions to autonomous levels, and transitions in the entire sales structure of the industry (online).  As of now, only 3% of inventory is new model years, compared to what should be 25% at the same stage.

As it is, sales in 2020 are expected to end a lengthy string of exceeding 17 million vehicles passing through North America’s showrooms. All things considered, sales approaching 14 million vehicles is actually quite impressive. But the lack of inventory now, and in the pipeline, combined with the ongoing challenges in production and employment due to COVID do not bode well for 2021 seeing any kind of quick turnaround for the industry.

And, there is an election. The regulatory and business environment could be almost anything 60 days from now, or 90 days, or 180 days. Predictability for the automotive industry has been hard to come by recently, and this election season has not helped.  At the end of the day, the automotive industry is no more immune from the craziness of 2020 (and maybe 2021) as most other industries.

© 2020 Foley & Lardner LLP
For more articles on cars, visit the National Law Review Utilities & Transport section.

FERC Requires Public Utilities to Address Excess ADIT in Transmission Rates

On November 21, 2019, the Federal Energy Regulatory Commission (“FERC”) issued Order No. 864, a final rule on Public Utility Transmission Rate Changes to Address Accumulated Deferred Income Taxes. The new rule requires  public utilities with formula transmission rates to revise their formula rates to include a transparent methodology to address the impacts of the Tax Cuts and Jobs Act of 2017 (2017 Tax Act) and future tax law changes on customer rates by accounting for “excess” or “deficient” Accumulated Deferred Income Taxes (ADIT).  FERC also required transmission providers with stated rates to account for the ADIT impacts of the 2017 Tax Act in their next rate case.

Background

The 2017 Tax Act reduced the corporate income tax rate from 35 percent to 21 percent. The tax rate change will result in a reduction in a public utility’s future tax liabilities so that a portion of its ADIT balances (rate receipts collected in anticipation of future tax liability) will no longer be due to the IRS, and is thus considered excess ADIT.  This transmission-related excess ADIT must be returned to customers through a public utility’s transmission rates.

FERC issued a Notice of Proposed Rulemaking (NOPR) on ADIT issues on November 15, 2018.   In the NOPR, FERC proposed to require public utilities with formula rates to adjust their formula rates to include (i) a mechanism to reflect any excess or deficient ADIT resulting from the 2017 Tax Act, or any future tax rate change, in rate base; (ii) a mechanism to adjust income tax allowance to reflect amortization of excess or deficient ADIT; and (iii) a new worksheet in its transmission formula rate to track on an annual basis information related to excess/deficient ADIT.  FERC also proposed to require public utilities with stated rates to make a compliance filing to address excess ADIT resulting from the 2017 Tax Act.

Order No. 864 – Final Rule on ADIT Adjustments to Account for Tax Rate Changes

ADIT Adjustments in Formula Rates

In the final rule, FERC adopted each of its proposals to address ADIT adjustments for transmission providers with formula rates.

  • Rate Base Adjustment Mechanism.  FERC required public utilities with formula rates to include a mechanism by which excess ADIT is deducted from rate base, and deficient ADIT is added to rate base.  This mechanism must be broad enough to cover any future tax changes that might give rise to excess/deficient ADIT.  FERC did not require use of a specific mechanism, and instead will consider proposed changes on a case-by-case basis.  FERC noted that, consistent with its previous accounting guidance, public utilities are required to record a regulatory asset (Account 182.3) associated with deficient ADIT or a regulatory liability (Account 254) associated with excess ADIT.
  • Income Tax Allowance Adjustment Mechanism.  FERC required public utilities with formula rates to incorporate a mechanism to adjust income tax allowances to reflect amortized excess or deficient ADIT.  This mechanism must cover amortization of excess or deficient ADIT resulting from any future tax changes as well as the 2017 Tax Act.  FERC will consider proposed changes on a case-by-case basis.  FERC clarified that, consistent with guidance provided in the 2017 Tax Act, excess ADIT that is “protected” (i.e., plant-related) should be amortized no more rapidly than over the life of the underlying asset using the Average Rate Assumption Method (ARAM), or an alternative method if insufficient data is available to use ARAM.  FERC will evaluate proposed amortization methods for the return of excess ADIT that is “unprotected” (i.e., not plant-related) on a case-by-case basis. FERC clarified that regardless of the effective date of tariff changes submitted by a public utility, the full amount of excess ADIT resulting from the 2017 Tax Act must be returned to its customers.
  • New ADIT Worksheet.  FERC required public utilities to add a new permanent worksheet that will annually track information related to excess or deficient ADIT in their formula rates.  FERC required that the new ADIT worksheet address: (1) how any ADIT accounts were re-measured and the excess or deficient ADIT contained therein; (2) the accounting for any excess or deficient amounts in Accounts 182.3 (Other Regulatory Assets) and 254 (Other Regulatory Liabilities); (3) whether the excess or deficient ADIT is protected or unprotected; (4) the accounts to which the excess or deficient ADIT are amortized; and (5) the amortization period of the excess or deficient ADIT being returned or recovered through the rates. FERC expects public utilities to identify each specific source of excess/deficient ADIT, classify such excess/deficient ADIT as protected or unprotected, and list the proposed amortization period associated with each classification or source.  FERC also expects public utilities to provide supporting documentation in their compliance filings to justify the proposed amortization periods.  FERC did not require that use of a pro forma worksheet to convey such information, but did require that on compliance, public utilities populate the worksheets with excess/deficient ADIT resulting from the 2017 Tax Act to facilitate review by interested parties.

FERC clarified that given the formula rate changes required in the final rule, public utilities with formula rates would not be required to make subsequent FPA Section 205 filings to address rate impacts of excess/deficient ADIT associated with future tax rate changes.  FERC also stated that a public utility may show that existing ADIT-related mechanisms meet the requirements of this final rule.

ADIT in Stated Rates

FERC declined to adopt its proposal to require public utilities with stated rates to determine excess ADIT resulting from the 2017 Tax Act and return such amounts to customers in a single-issue filing responding to the final rule.  Instead, FERC stated it would maintain the status quo under its precedent, which requires public utilities with stated rates to address excess/deficient ADIT, including that caused by the 2017 Tax Act, in their next rate case.  FERC clarified it will address the timing of proposed excess ADIT amortization on a case-by-case basis, and that public utilities may propose to delay such amortization until its next rate case.

Compliance Filings 

FERC required that public utilities with formula rates submit a compliance filing by the later of 30 days after the effective date of the final rule (the effective date will be 60 days after publication of the rule in the Federal Register) or the public utility’s next annual informational filing. FERC stated that proposed tariff changes to address the final rule’s requirements should be made effective on the effective date of the final rule.

Several public utilities have already revised their formula rates to address excess ADIT resulting from the 2017 Tax Act.  These filings sought to implement the requirements proposed by FERC in the NOPR.  Under the final rule, these utilities will need to make a compliance filing, but can argue that the already-made changes satisfy the requirements of the final rule.  These past filings may serve as helpful models for compliance filings by other utilities, but must be considered in light of the requirements of the final rule.

Public utilities with stated rates are not required to make a compliance filing; excess/deficient ADIT issues will be considered in the next rate proceeding.

© 2019 Van Ness Feldman LLP

ARTICLE BY Van F. Smith and  Ani M. Esenyan of  Van Ness Feldman LLP.
Read more about utility tax regulation on the Environmental, Energy & Resource law page of the National Law Review.

Uber Hack – Don’t Tell Anyone!

It’s been revealed that Uber’s database has been hacked, with the personal information of more than 57 million users and drivers worldwide compromised. That’s a big number, but we are becoming increasingly numb to this kind of revelation, with all the cyber-leaks now making the news. What was the more astounding aspect of this particular incident is the fact it has taken Uber over a year to reveal the security breach – with the attack taking place in October 2016.

Uber says that the hackers were able to download files containing information including the names and driver’s licence numbers of 600,000 drivers in the US, as well as the names, email addresses and phone numbers of millions of users worldwide.

Although Uber has now taken steps to notify the drivers affected by the hack, it’s reported that at the time of the breach, the company paid the hackers USD100,000 to delete the stolen data, and not reveal the breach.

In a statement, Uber CEO Dara Khosrowshani admitted that he became aware of the “inappropriate access [of] user data stored on a third-party cloud-based service” late last year, and that steps were taken to secure the data, and shut down further unauthorised access. However, Mr Khosrowshani noted he has no excuse as to why the massive breach is only being made public now.

For their roles in the cover-up, Uber chief security officer Joe Sullivan and his deputy have been ousted, while Uber says it’s taking “several actions”, including consulting the former general counsel of the US’ National Security Agency to prevent a future data breach.

This post was written by Cameron Abbott & Allison Wallace of K & L Gates.,Copyright 2017
For more legal analysis, go to The National Law Review

Automotive Supplier Industry Experts Convene in Detroit and Share 2018 Outlook

The Original Equipment Suppliers Association (OESA) held its 19th Annual Conference this week in suburban Detroit under the theme:  “The Industry’s New Landscape.”  And while much of the day was devoted to autonomous vehicle developments and the potential negative impacts on the industry’s North American competitiveness that would result from substantial changes to NAFTA, the afternoon session included a robust discussion of today’s strong market in North America and the more guarded outlook for 2018 and beyond.

 During this session, Mike Jackson, Executive Director of Strategy and Research for the OESA moderated a panel called “Cycle Dynamics:  The Industry Outlook Panel,” comprised of a leading automotive forecaster, a leading Wall Street analyst and the lead economist for one of the world’s largest OEMs.  While the panel remained fairly optimistic about the near term, the longer term theme was that the automotive industry is cyclical and the next down cycle is SOMEWHERE OUT THERE …

The panelists included Dr. G. Mustafa Mohatarem, Chief Economist, General Motors; John Murphy, Managing Director, U.S. Autos Equity Research, Bank of America Merrill Lynch; and Michael Robinet, Managing Director, Automotive Advisory Services, IHS Markit.

Dr. Mohatarem began with a very optimistic evaluation of the global economy, referring to our current condition as a “global synchronous expansion.”  Not only is the U.S. economy strong, but China’s growth has exceeded recent expectations, the EU has experienced a mini-boom after dodging a debt crisis, India continues to grow steadily and Russia and Brazil’s recessions have ended.  He noted that the current U.S. production rate is 17.4 -17.5 million units for 2017, a healthy market if not quite as healthy as last year.  On the cautionary side, he noted a potentially more hawkish bent to Fed policy and a significant labor shortage that will continue to dog the U.S. automotive industry.  On the whole though, he noted: “this is a very favorable time for the global automotive industry.”

Mike Robinet summed up current supplier sentiment as follows:  suppliers see the demand and the market opportunities out there, but there will be a lot of disruptors that can derail them.  These disruptors include the impact of “ACES” (Autonomous, Connected, Electrifiedand Shared), the emergence of “Super Tier 1’s” who may dominate the future landscape with their integration capabilities (leaving other suppliers behind potentially), shifting trade winds, indecision about U.S. regulatory policy including CAFÉ standards, and an acceleration of the planning cycle that creates execution risk.  He noted that the cadence of model changes has kept the supply base on its toes this year, as has the adjustment to the continuing decline in sedan sales (which was viewed by the panel as a continuing trend into the future).  Will the internal combustion engine disappear soon?  According to Robinet, 95% of the vehicles in North America will have an engine on board by 2025.  Places like China will see a faster adoption of EVs during this period, he noted, including as a result of government policies promoting them. He ended by cautioning suppliers not to focus too much on the “nirvana” of Level 5 autonomy, but rather to focus on the movement to Level 3 and 4 in the shorter term and try to find there place in those realms.

John Murphy, more bullish in recent times, conceded that he has “moderated his outlook a bit.”  Murphy noted that leasing is helping support current demand, but worries about the upcoming impacts on the used car market as those vehicles come off lease (which he referred to as a “tsunami” that will hit in 2018 and beyond).  He noted that vehicle pricing is also starting to moderate (unrelated to just mix), and that the CUV market is getting very crowded.  He described three “Big Bangs” that will shape the industry in the future:  The increase in the Efficiency of Travel (cost per mile), the impact of Autonomous Mobility On Demand on the ease and cost of travel, and the increase in Speed of Travel.  Only the latter will provide a material economic stimulus – the first two will provide only a marginal or moderate stimulus – but all three Big Bangs will significantly impact the automotive industry.   But, before these Big Bangs reach their full impact, Murphy sees a downturn within the next two years taking U.S. volume down below the 14 million unit level (compared to the miserable 9 million level reached during the Great Recession).  During the Q&A session that followed, Murphy noted that he expects EV penetration in the U.S. to reach 10% by 2025 (slightly more optimistic than Mike Robinet’s prediction).  He also noted his perception that we are not experiencing an auto technology valuation bubble despite the recent eye-popping valuations in this space (no irrational exuberance here!).

On the whole, the panel’s 2018 and beyond outlook is for an automotive supply industry in North America that continues to be good, with significant challenges and disruptors that must be overcome by those automotive suppliers who will flourish in the long term.

This post was written by Steven H. Hilfinger of Foley & Lardner LLP., © 2017