Don’t Let the Power Go Sour – Pitfalls of Powers of Appointment

Powers of appointment are among the most versatile tools in estate planning. They are often underutilized due to a lack of understanding of their benefits and limitations. At their core, a power of appointment allows an individual, designated by a legal instrument (the “donee” or receiver of the power of appointment), to determine who will receive certain property or interests in the future. The donor, who creates this power, retains flexibility in managing and distributing their estate.

However, caution is necessary when structuring powers of appointment, particularly in the context of the marital deduction. Improperly crafted powers can inadvertently invalidate the marital deduction, leading to significant estate tax consequences. For instance, if a power of appointment does not allow the donee (often the surviving spouse) to appoint property to themselves or their estate, the property may fail to qualify for the marital deduction. This is typically the case with a special (or limited) power of appointment. In contrast, a properly structured general power of appointment can ensure that the property qualifies for the marital deduction, deferring estate taxes until the surviving spouse’s death

Clarification – Donor and Donee Examples

A wealthy individual, the donor of the power of appointment, sets up a trust for their children. The trust includes a special power of appointment allowing the spouse (the donee) to distribute the trust’s assets among their children or grandchildren after the donor’s death. The spouse can decide which child receives what portion of the assets, giving flexibility to address changing family dynamics. This type of power is often chosen to retain control within the family while protecting the assets from the spouse’s creditors and excluding the assets from the spouse’s taxable estate.

A woman (the donor) creates a will that gives her husband (the donee) a general power of appointment over certain assets. This power allows the husband to decide who will inherit those assets upon his death, including the ability to appoint them to himself, his estate, or creditors. This flexibility can be particularly useful in managing taxes and ensuring the estate is distributed according to the most current family needs. However, because the assets are included in the husband’s estate for tax purposes, this power may also increase the taxable estate, potentially leading to higher estate taxes.

Types of Powers of Appointment

Powers of appointment are classified into several categories:

  1. Imperative vs. Non-Imperative Powers: Imperative powers must be exercised by the donee, while non-imperative powers are optional.
  2. Exclusive vs. Non-Exclusive Powers: Exclusive powers allow the donee to exclude certain eligible appointees, while non-exclusive powers require the donee to allocate some property to each appointee.
  3. General vs. Nongeneral (Special) Powers: General powers allow the donee to appoint property to themselves, their estate, or their creditors. In contrast, nongeneral powers restrict the donee from appointing property to these entities.
  4. Presently Exercisable vs. Postponed Powers: Presently exercisable powers can be used immediately, while postponed powers can only be exercised at a future date, often upon the donee’s death.

When to use General vs. Limited Powers of Appointment

General Power of Appointment: Best used in Marital Trusts (QTIP) or Revocable Trusts when flexibility, step-up in basis, and marital deduction eligibility are the primary goals, even though the assets will be included in the donee’s taxable estate.

Limited (Special) Power of Appointment: Best used in Irrevocable Trusts, Dynasty Trusts, Bypass Trusts, and Generation-Skipping Trusts where asset protection, tax minimization, control over distribution, and maintaining favorable tax treatment are the main objectives.

Estate Planning Goal/Consideration General Power of Appointment Limited (Special) Power of Appointment
Asset Protection Not recommended. Assets are exposed to the donee’s creditors. Recommended. Assets are protected from the donee’s creditors.
Typical Trusts  Rarely used in asset protection trusts.  Common in Irrevocable Trusts, Dynasty Trusts, and Spendthrift Trusts.
Inclusion in Donee’s Taxable Estate Recommended when a step-up in basis is desired. Not recommended. Assets are generally excluded from the donee’s taxable estate.
Typical Trusts Marital Trusts (QTIP) for step-up in basis. Irrevocable Life Insurance Trusts (ILITs), Generation-Skipping Trusts.
Eligibility for Marital Deduction Recommended. Ensures property qualifies for the marital deduction, deferring estate taxes. Not recommended. May disqualify property from the marital deduction.
Typical Trusts QTIP Trusts, Marital Trusts.  Not typically used in marital deduction trusts.
Control over Ultimate Distribution Provides flexibility but less control over final asset distribution. Recommended. Allows the donor to set clear boundaries on asset distribution.
Typical Trusts Marital Trusts, Family Trusts. Family Trusts, Bypass Trusts, Generation-Skipping Trusts.
Minimizing Estate Taxes for Donee Not recommended. Assets are included in the donee’s taxable estate. Recommended. Helps reduce the size of the donee’s taxable estate.
Typical Trusts Marital Trusts (when step-up is more beneficial). Bypass Trusts, Generation-Skipping Trusts.
Avoiding Generation-Skipping Transfer Tax (GSTT) Not recommended. May trigger GSTT if assets are transferred to skip generations. Recommended. Allows for strategic distribution to avoid GSTT.
Typical Trusts Marital Trusts (with no intent to skip generations). Generation-Skipping Trusts, Dynasty Trusts.
Flexibility for Changing Family Needs Recommended if flexibility to appoint to any individual or entity is desired. Provides some flexibility within the confines set by the donor.
Typical Trusts Revocable Trusts, Marital Trusts. Irrevocable Trusts, Family Trusts.
Retaining Favorable Tax Treatment in Trusts Not recommended. Could disrupt the trust’s tax status. Recommended. Helps maintain the trust’s favorable tax status, particularly for pre-existing trusts.
Typical Trusts  Rarely used in older trusts with favorable status. Grandfathered Trusts, Irrevocable Trusts.
When to Use in Marital Trusts (QTIP) Recommended if the intent is to qualify for the marital deduction. Not recommended for QTIP trusts as it may disqualify the trust.
Typical Trusts QTIP Trusts, Marital Trusts. Bypass Trusts, Family Trusts (outside of QTIP).

Table 1. General Overview of the suse of General and Limited(Special) Powers of Appointment in differnt estate plang contexts.

Exercising Powers of Appointment

The exercise of powers of appointment involves several considerations:

  • Class of Appointees: The group eligible to receive the property, which can range from specific individuals to broad categories like “descendants.”
  • Manner and Methods of Exercise: Powers can be exercised through various methods, including specific or blanket clauses. The intention to exercise must be clear and comply with any conditions set by the donor.
  • Capacity to Exercise: The donee must have the legal capacity to exercise the power, similar to the capacity required for property disposition.

Tax Implications

The tax consequences of powers of appointment are significant and complex. Please refer also to Table 1.

  1. Estate and Gift Tax: A general power of appointment can result in the inclusion of property in the donee’s estate, subjecting it to estate tax. The exercise or release of a general power is treated as a gift for tax purposes.
  2. Generation-Skipping Transfer (GST) Tax: Exercising a power of appointment can trigger GST tax if it involves skipping generations, though careful planning can mitigate this.
  3. Income Tax: Under Section 678 of the Internal Revenue Code, the exercise of a general power can result in the donee being treated as the owner of the trust for income tax purposes.

Planning Opportunities

Powers of appointment offer various strategic benefits in estate planning:

  • Flexibility: They allow the donee to adapt the distribution of property based on changing circumstances, providing tailored solutions for beneficiaries.
  • Extending Trust Terms: Powers can be used to extend the duration of a trust, potentially postponing tax consequences and providing long-term asset protection.
  • Generation Jumping: Powers can be used to skip generations, reducing the impact of GST tax by directly benefiting more remote descendants.

Selected Case Law and IRS Private Letter Rulings

The following cases and Private Letter Rulings (PLRs) illustrate the application and interpretation of powers of appointment, particularly general powers of appointment, in the context of federal estate tax law. Specifically, the cases address the tax implications of these powers concerning the marital deduction under Section 2056 of the Internal Revenue Code and whether certain powers of appointment qualify as general powers under Section 2041. Additionally, the cases and rulings explore the implications of trust reformation, particularly how state court modifications of trust instruments may or may not be recognized for federal tax purposes and how these reforms affect the classification and taxability of powers of appointment.

Estate of Kraus v. C.I.R, 875 F.2d 597 (7th Cir. 1989)

Issue

The primary issue in Estate of Kraus v. Commissioner is whether the reformation of a trust by a lower Illinois state court, which corrected a scrivener’s error that omitted a general power of appointment necessary for the marital deduction under Section 2056 of the Internal Revenue Code, should be recognized by the federal Tax Court for estate tax purposes.

Rule

Federal courts, including the Tax Court, are not bound by decisions of lower state courts when interpreting state law for federal tax purposes. According to the precedent established in Commissioner v. Estate of Bosch, only a state’s highest court can issue rulings on state law that are binding on federal courts. Federal courts are required to give “proper regard” to lower state court rulings but are not obligated to follow them if they conflict with federal tax law principles.

Application

In this case, Arthur S. Kraus amended his insurance trust in 1977, inadvertently converting a general power of appointment into a special power due to a scrivener’s error. This error prevented the estate from qualifying for the marital deduction under Section 2056 of the Internal Revenue Code. After Kraus’s death, the estate sought reformation of the trust in an Illinois state court, which granted the reformation, restoring the general power of appointment.

The estate argued that the reformed trust should be recognized by the Tax Court to allow the marital deduction. However, the Tax Court ruled that the state court’s reformation was not binding for federal tax purposes and determined that the trust, as amended in 1977, did not qualify for the marital deduction. The Tax Court found that the estate had not provided sufficient evidence to prove that the omission of the general power of appointment was a mistake warranting reformation under Illinois law.

Furthermore, the Tax Court noted that the decedent, Arthur S. Kraus, was aware of the language necessary to include a general power of appointment, and the amended trust explicitly created a special power instead. This finding was based on the court’s review of stipulated facts, the testimony of attorney Rotman (who drafted the trust amendment), and the original and amended trust documents.

The estate later discovered new evidence that corroborated the claim of a scrivener’s error. The Tax Court initially denied the estate’s motion for reconsideration based on this newly discovered evidence. However, on appeal, the Seventh Circuit Court of Appeals found that the newly discovered evidence was material and likely to change the outcome of the case. The appellate court ruled that the Tax Court abused its discretion in denying the motion for reconsideration and remanded the case for further proceedings.

Conclusion

The Seventh Circuit Court of Appeals affirmed the Tax Court’s decision to uphold the deficiency assessment, agreeing that the original reformation by the state court was not binding for federal tax purposes. However, the appellate court reversed the Tax Court’s denial of the motion for reconsideration, holding that the newly discovered evidence should be admitted and that the case should be reconsidered in light of this evidence. The case was remanded to the Tax Court for further proceedings.

This case illustrates the principle that federal tax courts are not bound by lower state court decisions regarding the reformation of legal instruments when determining federal tax liabilities. It emphasizes the importance of a state’s highest court in issuing binding interpretations of state law for federal purposes.

LTR 9303022 IRS Private Letter Ruling

Issue:

In this case, the issue is whether the reformation of a will by a state court, which retroactively removes a general power of appointment granted to certain beneficiaries, should be treated as a release of that power under Sections 2041 and 2514 of the Internal Revenue Code, thereby subjecting the property to estate and gift taxes.

Rule:

According to Sections 2041(a)(2) and 2514(b) of the Internal Revenue Code, the exercise or release of a general power of appointment is considered a transfer of property and may result in the inclusion of that property in the gross estate of the individual holding the power. See, however, above. Per Estate of Bosch v. United States, the Internal Revenue Service (IRS) is not bound by decisions of lower state courts unless those decisions are consistent with the rulings of the state’s highest court.

Application:

In this case, the Husband and Wife created testamentary trusts that inadvertently granted their Son and Daughter 1 general powers of appointment over their respective trusts, allowing them to invade the trust principal for purposes not limited by an ascertainable standard. This mistake occurred due to an oversight by the law firm drafting the wills, as it failed to include a provision that would restrict the exercise of discretionary powers by beneficiaries who are also trustees.

After the Wife’s death, the Husband petitioned the probate court to reform the trusts to retroactively limit the exercise of the discretionary powers to an independent trustee, thereby preventing the Son and Daughter 1 from holding general powers of appointment. The probate court issued a conditional order to this effect.

The IRS examined whether this reformation constituted a “release” of a general power of appointment, which would trigger estate and gift tax consequences under Sections 2041 and 2514. The IRS concluded that the reformation did not constitute a release because the intent of the Husband and Wife was clearly to prevent their children from holding such powers. The IRS reasoned that, in a bona fide adversarial proceeding, the highest state court would likely deny the Son and Daughter 1 the general powers of appointment before they could become exercisable.

Therefore, the reformation by the lower court would not be considered a release of a general power of appointment under Section 2514, and the trust property would not be included in the taxable estates of the Son or Daughter 1 under Section 2041. Additionally, the reformation did not alter the trust’s status as irrevocable before September 25, 1985, for the generation-skipping transfer tax purposes.

Conclusion:

The IRS ruled that the reformation of the will to limit the discretionary powers of the Son and Daughter 1 did not constitute a release of a general power of appointment. Consequently, the reformation would not cause the inclusion of the trust property in the taxable estates of the Son or Daughter 1, nor would it impact the treatment of the trusts for generation-skipping transfer tax purposes. This ruling was based on the specific facts and applicable law at the time of the request and would not be retroactively applied if there were material fact or law changes.

LTR 9516051 IRS Private Letter Ruling

Issue:

Does the power held by the trustee of a testamentary trust, which allows the trustee to distribute principal to herself as a beneficiary, constitute a general power of appointment under Section 2041 of the Internal Revenue Code?

Rule:

Under Section 2041(a)(2) of the Internal Revenue Code, the value of any property over which the decedent has a general power of appointment is included in the gross estate for estate tax purposes. A general power of appointment is defined under Section 2041(b)(1) as a power exercisable in favor of the decedent, the decedent’s estate, creditors, or the creditors of the decedent’s estate. However, if the power is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent, it is not considered a general power of appointment.

Application:

In this case, the decedent was the trustee of a trust created by her deceased spouse’s will, with the power to distribute principal to herself as the beneficiary if, in her sole discretion, it was deemed “requisite or desirable.” This power would generally constitute a general power of appointment under Section 2041, as it allows the trustee to distribute principal to herself without restriction.

However, North Carolina General Statute 32-34(b) imposes limitations on a fiduciary’s power to exercise such discretion. Specifically, the statute prohibits a trustee from exercising a power in favor of themselves, their estate, their creditors, or the creditors of their estate unless the trust document explicitly overrides this limitation. Since the trust document in this case did not override the statute, the decedent, as trustee, did not have a general power of appointment under North Carolina law.

The IRS recognizes that state law governs the creation of legal rights and interests in property, including the scope of powers of appointment. Consequently, under North Carolina law and similar IRS precedents (Rev. Rul. 76-502 and Rev. Proc. 94-44), the decedent’s power as trustee did not qualify as a general power of appointment for federal estate tax purposes.

Conclusion:

The power held by the decedent as trustee of her spouse’s testamentary trust does not constitute a general power of appointment for purposes of Section 2041. Therefore, the value of the trust property is not included in the decedent’s gross estate for estate tax purposes under Section 2041.

Leahy Guiney v. United States of America 425 F.2d 145

Issue:

Does the language in Item Second of Arthur Hamilton Leahy’s will grant his widow a “general power of appointment” sufficient to qualify for the marital deduction under Section 2056(b)(5) of the Internal Revenue Code?

Rule:

Under Section 2056(b)(5) of the Internal Revenue Code, a marital deduction is allowed if the surviving spouse is entitled for life to all the income from the entire interest in the property and has a general power of appointment over the property. A general power of appointment is defined under Section 2041(b)(1) as a power exercisable in favor of the decedent, the decedent’s estate, creditors, or the creditors of the decedent’s estate. The interpretation of whether a power qualifies as a general power of appointment is determined according to the applicable state law.

Application:

In this case, Arthur Hamilton Leahy’s will included language that explicitly stated his intention to grant his widow a “general power of appointment” over the trust assets to ensure that one-half of his estate qualified for the marital deduction. The key issue was whether this language effectively granted the widow the power to appoint the trust principal to herself or her estate, as required by Section 2056(b)(5) of the Internal Revenue Code.

The IRS Commissioner initially denied the marital deduction, arguing that under Maryland law, the language used in the will did not grant the widow a general power of appointment that would allow her to appoint the trust principal to herself or her estate. The District Court upheld the Commissioner’s decision, relying on prior Maryland case law that had narrowly construed similar language as not granting a general power of appointment.

However, upon appeal, the Fourth Circuit considered more recent developments in Maryland law, particularly the decision in Frank v. Frank and the prior decision in Leser v. Burnet by the same court. The appellate court recognized that Maryland courts had evolved to a more modern interpretation that allowed for a general power of appointment when the testator’s intent to grant such power was clear. The court found that the language in Mr. Leahy’s will, which explicitly referred to the “general power of appointment” and the marital deduction under the Internal Revenue Code, was more precise and explicit than the language in previous cases where the power had been found lacking.

The Fourth Circuit concluded that the language used in Mr. Leahy’s will was sufficient to grant his widow a general power of appointment that met the requirements of Section 2056(b)(5) of the Internal Revenue Code, thereby qualifying the estate for the marital deduction.

Conclusion:

The language in Item Second of Arthur Hamilton Leahy’s will effectively granted his widow a general power of appointment over the trust principal, sufficient to meet the requirements for the marital deduction under Section 2056(b)(5) of the Internal Revenue Code. The Fourth Circuit reversed the District Court’s decision and remanded the case for the entry of judgment in favor of the taxpayer.

Special Issues for Fiduciaries and Creditors

Fiduciaries and creditors have specific considerations when dealing with powers of appointment:

  • Creditor Rights: Generally, property subject to a nongeneral power is protected from the donee’s creditors. However, property under a general power may be vulnerable, depending on the circumstances.
  • Fiduciary Responsibilities: Fiduciaries must carefully manage and exercise powers of appointment, balancing the donor’s intentions with the donee’s interests and tax implications.

Powers of Appointment and Decanting

Decanting, the process of transferring assets from one trust to another, can be facilitated through powers of appointment. This allows for the modification of trust terms, potentially reducing tax burdens and enhancing the trust’s effectiveness.

Conclusion

Powers of appointment are powerful and flexible tools in estate planning, offering both opportunities and potential pitfalls. When structured properly, they can achieve various planning goals, such as securing the marital deduction, ensuring flexibility in asset distribution, and protecting assets from creditors. However, the complexity surrounding the different types of powers—general versus limited—requires careful consideration and precise drafting to avoid unintended tax consequences. The discussed cases and rulings highlight the critical importance of understanding how powers of appointment are treated under both federal tax law and state law, particularly in the context of trust reformation. As illustrated, the reformation of trusts by state courts may not always be recognized for federal tax purposes, emphasizing the need for estate planners to carefully navigate these issues to ensure that the donor’s intentions are fulfilled and tax benefits are preserved. In summary, while powers of appointment are versatile tools, their effective use in estate planning necessitates a thorough understanding of their implications, meticulous drafting, and, where necessary, appropriate legal reformations.

Further Reading

Jonathan G. Blattmachr, Kim Kamin & Jeffrey M. Bergman, Estate Planning’s Most Powerful Tool: Powers of Appointment Refreshed, Redefined, and Reexamined, https://perma.cc/AQ6W-PH72.

© 2024 wealthcarelawyer.com. All rights reserved.
 For more news on Powers of Appointment, visit the NLR Estates & Trusts section.

EPA Announces 8-Month Delay in Submission Window for TSCA PFAS Reporting Rule

The U.S. Environmental Protection Agency (EPA) is modifying the Toxic Substances Control Act (TSCA) regulation imposing reporting and recordkeeping requirements for perfluoroalkyl and polyfluoroalkyl substances (the Rule) to delay the reporting period by eight months. The Rule, as finalized last year, included a reporting window that would open on November 12, 2024, and close for most companies on May 8, 2025. EPA is now delaying the submission period by eight months. With this delay, the reporting period will open on July 11, 2025, and close, for most companies, on January 11, 2026. EPA is also making a technical correction to address a typographical error in the Rule’s text, and the delay and correction are being announced as a direct final rule that will become effective within 60 days of publication unless the agency receives an adverse public comment within 30 days of publication.

Background on the Rule

As discussed in our previous alert, the Rule sweeps broadly to require reporting on the manufacture (including import) of PFAS in any amount between 2011 and 2022. Companies that imported PFAS-containing articles during this period are also in scope, though these companies can report using a streamlined form. The Rule does not incorporate exemptions typically applied in other TSCA rules, such as for byproducts, impurities, or for most research and development (R&D). The Rule also does not incorporate a de minimis volume threshold. In-scope companies must report online through EPA’s CDX portal.

EPA’s Justification for the Delayed Submission Period

With the 8-month delay, the submission period will begin on July 11, 2025, and, for most companies, end on January 11, 2026. This submission period will end on July 11, 2026, for article importers that are considered small manufacturers. To justify the delay, EPA stated in the preamble that it “is compelled to take this action in response to constraints on the timely development and testing of the software being developed to collect information pursuant to this reporting rule (i.e., the rule’s reporting application).” EPA also cited the agency’s increased responsibilities in implementing TSCA as amended by the 2016 Frank R. Lautenberg Chemical Safety for the 21st Century Act and EPA’s reduced funding as reasons for the delayed reporting period.

Technical Correction in the Regulatory Text

In addition to the delayed reporting period, EPA is correcting a typographical error in the Rule’s paragraph at 40 CFR 705.15(f)(1). Subpart (f) in 40 CFR 705.15 requires companies to submit all existing information concerning the environmental and health effects of a reported PFAS, and paragraph (f)(1) states that each “published study report” submitted on such effects must be reported using Organization for Economic Cooperation and Development Harmonized Templates (OHTs). EPA is amending this requirement to apply to “unpublished study reports,” since, as discussed by EPA in the preamble, requiring OHTs for published study reports was not the intent of the Rule. However, it should be noted that article importers using the streamlined article importer reporting form are not required to submit the information described in subpart (f) in 40 CFR 705.15.

These Changes Are Being Made as a Direct Final Rule

EPA is taking direct final action to implement the delayed reporting window and technical correction because the agency views this as a noncontroversial action and anticipates no adverse comment. This direct final rule is scheduled for publication in the Federal Register on September 5, 2024; the direct final rule will then become effective 60 days after publication unless EPA receives an adverse comment within 30 days of publication. If an adverse public comment is received, EPA will publish a withdrawal in the Federal Register informing the public that the direct final rule will not take effect.

© 2024 Beveridge & Diamond PC
For more news on EPA Reporting Deadlines, visit the NLR Environmental Energy Resources section.

Legal and Privacy Considerations When Using Internet Tools for Targeted Marketing

Businesses often rely on targeted marketing methods to reach their relevant audiences. Instead of paying for, say, a television commercial to be viewed by people across all segments of society with varied purchasing interests and budgets, a business can use tools provided by social media platforms and other internet services to target those people most likely to be interested in its ads. These tools may make targeted advertising easy, but businesses must be careful when using them – along with their ease of use comes a risk of running afoul of legal rules and regulations.

Two ways that businesses target audiences are working with influencers who have large followings in relevant segments of the public (which may implicate false or misleading advertising issues) and using third-party “cookies” to track users’ browsing history (which may implicate privacy and data protection issues). Most popular social media platforms offer tools to facilitate the use of these targeting methods. These tools are likely indispensable for some businesses, and despite their risks, they can be deployed safely once the risks are understood.

Some Platform-Provided Targeted Marketing Tools May Implicate Privacy Issues
Google recently announced1 that it will not be deprecating third-party cookies, a reversal from its previous plan to phase out these cookies. “Cookies” are small pieces of code that track users’ activity online. “First-party” cookies often are necessary for the website to function properly. “Third-party” cookies are shared across websites and companies, essentially tracking users’ browsing behaviors to help advertisers target their relevant audiences.

In early 2020, Google announced2 that it would phase out third-party cookies, which are associated with privacy concerns because they track individual web-browsing activity and then share that data with other parties. Google’s 2020 announcement was a response to these concerns.

Fast forward about four and a half years, and Google reversed course. During that time, Google had introduced alternatives to third-party cookies, and companies had developed their own, often extensive, proprietary databases3 of information about their customers. However, none of these methods satisfied the advertising industry. Google then made the decision to keep third-party cookies. To address privacy concerns, Google said it would “introduce a new experience in Chrome that lets people make an informed choice that applies across their web browsing, and they’d be able to adjust that choice at any time.”4

Many large platforms in addition to Google offer targeted advertising services via the use of third-party cookies. Can businesses use these services without any legal ramifications? Does the possibility for consumers to opt out mean that a user cannot be liable for privacy concerns if it relies on third-party cookies? The relevant cases have held that individual businesses still must be careful despite any opt-out and other built-in tools offered by these platforms.

Two recent cases from the Southern District of New York5 held that individual businesses that used “Meta Pixels” to track consumers may be liable for violations of the Video Privacy Protection Act (VPPA). 19 U.S.C. § 2710. Facebook defines a Meta Pixel6 as a “piece of code … that allows you to … make sure your ads are shown to the right people … drive more sales, [and] measure the results of your ads.” In other words, a Meta Pixel is essentially a cookie provided by Meta/Facebook that helps businesses target ads to relevant audiences.

As demonstrated by those two recent cases, businesses cannot rely on a platform’s program to ensure their ad targeting efforts do not violate the law. These violations may expose companies to enormous damages – VPPA cases often are brought as class actions and even a single violation may carry damages in excess of $2,500.

In those New York cases, the consumers had not consented to sharing information, but, even if they had, the consent may not suffice. Internet contracts, often included in a website’s Terms of Service, are notoriously difficult to enforce. For example, in one of those S.D.N.Y. cases, the court found that the arbitration clause to which subscribers had agreed was not effective to force arbitration in lieu of litigation for this matter. In addition, the type of consent and the information that websites need to provide before sharing information can be extensive and complicated, as recently reported7 by my colleagues.

Another issue that companies may encounter when relying on widespread cookie offerings is whether the mode (as opposed to the content) of data transfer complies with all relevant privacy laws. For example, the Swedish Data Protection Agency recently found8 that a company had violated the European Union’s General Data Protection Regulation (GDPR) because the method of transfer of data was not compliant. In that case, some of the consumers had consented, but some were never asked for consent.

Some Platform-Provided Targeted Marketing Tools May Implicate False or Misleading Advertising Issues
Another method that businesses use to target their advertising to relevant consumers is to hire social media influencers to endorse their products. These partnerships between brands and influencers can be beneficial to both parties and to the audiences who are guided toward the products they want. These partnerships are also subject to pitfalls, including reputational pitfalls (a controversial statement by the influencer may negatively impact the reputation of the brand) and legal pitfalls.

The Federal Trade Commission (FTC) has issued guidelines9 Concerning Use of Endorsements and Testimonials” in advertising, and published a brochure for influencers, “Disclosures 101 for Social Media Influencers,”10 that tells influencers how they must apply the guidelines to avoid liability for false or misleading advertising when they endorse products. A key requirement is that influencers must “make it obvious” when they have a “material connection” with the brand. In other words, the influencer must disclose that it is being paid (or gains other, non-monetary benefits) to make the endorsement.

Many social media platforms make it easy to disclose a material connection between a brand and an influencer – a built-in function allows influencers to simply click a check mark to disclose the existence of a material connection with respect to a particular video endorsement. The platform then displays a hashtag or other notification along with the video that says “#sponsored” or something similar. However, influencers cannot rely on these built-in notifications. The FTC brochure clearly states: “Don’t assume that a platform’s disclosure tool is good enough, but consider using it in addition to your own, good disclosure.”

Brands that sponsor influencer endorsements may easily find themselves on the hook if the influencer does not properly disclose that the influencer and the brand are materially connected. In some cases, the contract between the brand and influencer may pass any risk to the brand. In others, the influencer may be judgement proof, or the brand is an easier target for enforcement. And, unsurprisingly, the FTC has sent warning letters11 threatening high penalties to brands for influencer violations.

The Platform-Provided Tools May Be Deployed Safely
Despite risks involved in some platform-provided tools for targeted marketing, these tools are very useful, and businesses should continue to take advantage of them. However, businesses cannot rely on these widely available and easy-to-use tools but must ensure that their own policies and compliance programs protect them from liability.

The same warning about widely available social media tools and lessons for a business to protect itself are also true about other activities online, such as using platforms’ built-in “reposting” function (which may implicate intellectual property infringement issues) and using out-of-the-box website builders (which may implicate issues under the Americans with Disabilities Act). A good first step for a business to ensure legal compliance online is to understand the risks. An attorney experienced in internet law, privacy law and social media law can help.

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1 https://privacysandbox.com/news/privacy-sandbox-update/

2 https://blog.chromium.org/2020/01/building-more-private-web-path-towards.html

3 Businesses should ensure that they protect these databases as trade secrets. See my recent Insights at https://www.wilsonelser.com/sarah-fink/publications/relying-on-noncompete-clauses-may-not-be-the-best-defense-of-proprietary-data-when-employees-depart and https://www.wilsonelser.com/sarah-fink/publications/a-practical-approach-to-preserving-proprietary-competitive-data-before-and-after-a-hack

4 https://privacysandbox.com/news/privacy-sandbox-update/

5 Aldana v. GamesStop, Inc., 2024 U.S. Dist. Lexis 29496 (S.D.N.Y. Feb. 21, 2024); Collins v. Pearson Educ., Inc., 2024 U.S. Dist. Lexis 36214 (S.D.N.Y. Mar. 1, 2024)

6 https://www.facebook.com/business/help/742478679120153?id=1205376682832142

7 https://www.wilsonelser.com/jana-s-farmer/publications/new-york-state-attorney-general-issues-guidance-on-privacy-controls-and-web-tracking-technologies

8 See, e.g., https://www.dataguidance.com/news/sweden-imy-fines-avanza-bank-sek-15m-unlawful-transfer

9 https://www.ecfr.gov/current/title-16/chapter-I/subchapter-B/part-255

10 https://www.ftc.gov/system/files/documents/plain-language/1001a-influencer-guide-508_1.pd

11 https://www.ftc.gov/system/files/ftc_gov/pdf/warning-letter-american-bev.pdf
https://www.ftc.gov/system/files/ftc_gov/pdf/warning-letter-canadian-sugar.pdf

© 2024 Wilson Elser
For more news on Targeted Online Marketing, visit the NLR Communications, Media, and Internet section.

DOJ, FTC, DOL, and NLRB Join Forces and Announce Memorandum of Understanding on Labor Issues in Merger Investigations

On August 28, the US Department of Justice (DOJ) Antitrust Division, which enforces the US antitrust laws including the Sherman Act and Clayton Act, and the Federal Trade Commission (FTC), which enforces the Federal Trade Commission Act and other laws and regulations prohibiting unfair methods of competition (together, Antitrust Agencies), along with the US Department of Labor (DOL) and National Labor Relations Board (NLRB) (together, Labor Agencies), announced that they entered into a Memorandum of Understanding on Labor Issues in Merger Investigations (MOU).
The MOU took effect on August 28 and expires in five years, unless it is extended or terminated upon written agreement of each of the agencies.

Purpose of the MOU

The MOU outlines a collaborative initiative between the signatory agencies to assist the Antitrust Agencies with labor issues that may arise during the course of antitrust merger and acquisition (M&A) investigations, commenced under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). The HSR requires that parties to certain large M&As provide information to the Antitrust Agencies prior to the transaction’s consummation, which allows these agencies to analyze the anticipated transaction(s) and provide greater certainty to the parties regarding potential antitrust concerns.

From a labor perspective, these investigations may aim to evaluate whether the effect of a merger or acquisition could substantially lessen competition for labor. The stated goal of this MOU is to protect employees and promote fair competition in labor markets. Specifically, the MOU outlines methods by which the Labor Agencies may aid or advise the Antitrust Agencies on potential labor issues identified during the course of these evaluations. These methods include the following.

1. Labor Information Sharing

The MOU outlines various ways in which the Antitrust Agencies may work with the Labor Agencies to gather information used to evaluate potential impacts of M&As on labor markets. These include:

  1. Soliciting information from relevant worker stakeholders and organizations.
  2. Seeking the production of information and data with respect to labor markets.
  3. Searching publicly available sources of information made available by the Labor Agencies.
  4. Seeking production of non-public information and data related to labor markets from the Labor Agencies.

2. Providing Training and Technical Assistance

Labor Agencies agree to provide technical assistance and training to personnel from the Antitrust Agencies related to subject matter under their jurisdictions. For example, the NLRB will train personnel from Antitrust Agencies on labor-related issues such as the duty to bargain in good faith, successor bargaining obligations, and unfair labor practices. Additionally, the Antitrust Agencies may seek technical assistance on labor and employment law matters in merger reviews, including in the resolution of labor market merger investigations.

3. Collaborative Meetings

The Labor Agencies and Antitrust Agencies will seek to meeting biannually to discuss the implementation and coordination of activities outlined in the MOU.

This MOU expands upon collaborative efforts amongst the agencies and builds upon several MOUs executed in 2022 and 2023. MOUs between the DOJ and DOL, DOJ and NLRB, DOL and FTC, and FTC and NLRB all indicate that the purpose and scope of the agreements are to “strengthen the Agencies’ partnership through greater coordination in information sharing, coordinated investigations and enforcement activity, training, education, and outreach.”

Takeaways

This multi-agency agreement further emphasizes the current administration’s focus on protecting employees from alleged unfair methods of competition. This MOU is further evidence that antitrust regulators are looking at antitrust enforcement from a new perspective. Traditionally, Antitrust Agencies evaluated proposed M&As to identify potential risks of harm to consumers through the reduction of options or increased prices. Now, Antitrust Agencies appear to have turned their focus towards anticompetitive behaviors that may harm employees.

Employers interested or involved in an M&A deal should conduct thorough internal reviews to ensure compliance with both labor-related and fair competition laws. In the event of a review by the DOJ or FTC, employers should partner with experienced labor and employment lawyers to navigate through these investigations.

© 2024 ArentFox Schiff LLP
For more on Merger Investigations, visit the NLR Mergers Acquisitions section

Arguing Internet Availability to Establish Copyright Infringement Is Bananas

In an unpublished opinion, the US Court of Appeals for the Eleventh Circuit affirmed a district court’s decision finding that a pro se Californian artist failed to establish that an Italian artist had reasonable opportunity to access the copyrighted work simply because it was available to view on the internet. Morford v. Cattelan, Case No. 23-12263 (11th Cir. Aug. 16, 2024) (Jordan, Pryor, Branch, JJ.) (per curiam).A plaintiff alleging copyright infringement may show factual copying by either direct or indirect evidence showing “that the defendant had access to the copyrighted work and that there are probative similarities between the allegedly infringing work and the copyrighted work.” To do so, however, the copyright owner must establish a nexus between the work and the defendant’s alleged infringement. Mere access to a work disseminated in places or settings where the defendant may have come across it is not sufficient.

Joe Morford’s Banana and Orange and Maurizio Cattelan’s Comedian both “involve the application of duct tape to a banana against a flat surface” (see images below from the court decision’s appendix). Cattelan’s Comedian went viral and sold for more than $100,000 at Miami’s Art Basel. Morford claimed that Comedian was a copy. The district court found that Morford failed to show that Cattelan had reasonable opportunity to access Banana and Orange and thus could not establish a copyright claim. Morford appealed.

Orange and Banana, Comedian

On appeal, Morford argued that because he could show striking similarity between Banana and Orange and Comedian, he was not required to proffer evidence of access to show copyright infringement. In the alternative, he argued that he could show substantial similarity and that Cattelan had reasonable opportunity to access Banana and Orange as it was widely disseminated and readily discoverable online.

The Eleventh Circuit explained that in circuits adopting a widespread dissemination standard, that standard requires showing that the work enjoyed “considerable success or publicity.” Morford showed that Banana and Orange was available on his public Facebook page for almost 10 years and featured on his YouTube channel and in a blog post, with views in more than 25 countries. But Banana and Orange’s availability on the internet, without more, was “too speculative to find a nexus” between Cattelan and Morford to satisfy the factual copying prong of a copyright infringement claim, according to the Court.

The Eleventh Circuit also found that Morford failed to meet the high burden of demonstrating that the original work and accused infringement were so strikingly similar as to establish copying. Such similarity exists if the similarity in appearance between the two works “is so great that [it] precludes the possibility of coincidence, independent creation or common source,” but identical expression does not necessarily constitute infringement. In this analysis, a court addresses the “uniqueness or complexity of the protected work as it bears on the likelihood of copying.” Morford argued that he established striking similarity based on the “same two incongruous items being chosen, grouped, and presented in the same manner within both works.” Although the two incongruous items in both works were similar (i.e., a banana and duct tape), the Court decided that there were sufficient differences between Banana and Orange and Comedian to preclude a finding of striking similarity. Banana and Orange had both a banana and an orange held by duct tape, while Comedian only contained a banana.

© 2024 McDermott Will & Emery
For more news on Copyright Infringement Litigation, visit the NLR Intellectual Property section.

“Is SEO Dead?” Why AI Isn’t the End of Law Firm Marketing

With the emergence of Artificial Intelligence (AI) technology, many business owners have feared that marketing as we know it is coming to an end. After all, Google Gemini is routinely surfacing AI-generated responses over organic search results, AI content is abundant, and AI-driven tools are being used more than ever to automate tasks previously performed by human marketers.

But it’s not all doom and gloom over here—there are many ways in which digital marketing, including Search Engine Optimization (SEO) —is alive and well. This is particularly true for the legal industry, where there are many limits to what AI can do in terms of content creation and client acquisition.

Here’s how the world of SEO is being impacted by AI, and what this means for your law firm marketing.

Law Firm Marketing in the Age of AI

The Economist put it best: the development of AI has resulted in a “tsunami of digital innovation”. From ChatGPT’s world-changing AI model to the invention of “smart” coffee machines, AI appears to be everything. And it has certainly shaken up the world of law firm marketing.

Some of these innovations include AI chatbots for client engagement, tools like Lex Machina and Premonition that use predictive analytics to generate better leads, and AI-assisted legal research. Countless more tools and formulas have emerged to help law firms streamline their operations, optimize their marketing campaigns, create content, and even reduce overhead.

So, what’s the impact? 

With AI, law firms have reduced their costs, leveraging automated tools instead of manual efforts. Legal professionals have access to more data to identify (and convert) quality leads. And it’s now easier than ever to create content at volume.

At the same time, though, many people question the quality and accuracy of AI content. Some argue that AI cannot capture the nuance of the human experience or understanding complex (and often emotional) legal issues. Even more, AI-generated images and content often lack a personalized touch.

One area of marketing that’s particularly impacted by this is SEO, as it is largely driven by real human behavior, interactions, and needs.

So, is SEO Dead?

Even though many of the tools and techniques of SEO for lawyers have changed, the impact of SEO is still alive and well. Businesses continue to benefit from SEO strategies, allowing their brands to surface in the search results and attract new customers. In fact, there may even be more opportunities to rank than ever before.

For instance, Google showcases not only organic results but paid search results, Google Map Pack, Images, News, Knowledge Panel, Shopping, and many more pieces of digital real estate. This gives businesses different content formats and keyword opportunities to choose from.

Also, evolution in the SEO landscape is nothing new. There have been countless algorithm changes over the years, often in response to user behavior and new technology. SEO may be different, but it’s not dead.

Why SEO Still Matters for Law Firms

With the SEO industry alive and well, it’s still important for law firms to have a strong organic presence. This is because Google remains the leading medium through which people search for legal services. If you aren’t ranking high in Google, it will be difficult to get found by potential clients.

Here are some of the many ways SEO still matters for law firms, even in the age of AI.

1. Prospective clients still use search engines

Despite the rise of AI-based tools, your potential clients rely heavily on search engines when searching for your services. Whether they’re looking for legal counsel or content related to specific legal issues, search engines remain a primary point of entry.

Now, AI tools can often assist in this search process, but they rarely replace it entirely. SEO ensures your firm is visible when potential clients search for these services.

2. Your competitors are ranking in Search

Conduct a quick Google search of “law firm near me,” and you’ll likely see a few of your competitors in the search results. Whether they’re implementing SEO or not, their presence is a clear indication that you’ll need some organic momentum in order to compete.

Again, potential clients are using Google to search for the types of services you offer, but if they encounter your competitors first, they’re likely to inquire with a different firm. With SEO, you help your law firm stand out in the search results and become the obvious choice for potential clients.

3. AI relies on search engine data

The reality is that AI tools actually harness search engine data to train their models. This means the success of AI largely depends on people using search engines on a regular basis. Google isn’t going anywhere, so AI isn’t likely to go anywhere, either!

Whether it’s voice search through virtual assistants or AI-driven legal content suggestions, these systems still rely on the vast resources that search engines like Google organize. Strong SEO practices are essential to ensure your law firm’s website is part of that data pool. AI can’t bypass search engines entirely, so optimizing for search ensures your firm remains discoverable.

4. AI can’t replace personalized content

Only as a lawyer do you have the experience and training to advise clients on complex legal issues. AI content — even if only in your marketing — will only take you so far. Potential clients want to read content that’s helpful, relatable, and applicable to their needs.

While AI can generate content and provide answers, legal services are inherently personal. Writing your own content or hiring a writer might be your best bet for creating informative, well-researched content. AI can’t replicate the nuanced understanding that comes from a real lawyer, as your firm is best equipped to address clients’ specific legal issues.

5. SEO is more than just “content”

In the field of SEO, a lot of focus is put on content creation. And while content is certainly important (in terms of providing information and targeting keywords), it’s only one piece of the pie. AI tools are not as skilled at the various aspects of SEO, such as technical SEO and local search strategies.

Local SEO is essential for law firms, as most law firms serve clients within specific geographical areas. Google’s algorithm uses localized signals to determine which businesses to show in search results. This requires an intentional targeting strategy, optimizing your Google Business Profile, submitting your business information to online directories, and other activities AI tools have yet to master.

AI doesn’t replace the need for local SEO—if anything, AI-enhanced local search algorithms make these optimizations even more critical!

Goodbye AI, hello SEO?

Overall, the legal industry is a trust-based business. Clients want to know they work with reputable attorneys who understand their issues. AI is often ill-equipped to provide that level of expertise and personalized service.

Further, AI tools have limitations regarding what they can optimize, create, and manage. AI has not done away with SEO but has undoubtedly changed the landscape. SEO is an essential part of any law firm’s online marketing strategy.

AI is unlikely to disappear any time soon, and neither is SEO!

Copyright 2024 © Hennessey Digital
For more news on AI and Law Firm Marketing, visit the NLR Communications Media Internet section.

You Are Sponsoring a Foreign National Employee for Permanent Residency, Can You Clawback Some of the Fees?

Companies usually hire a foreign national who requires visa sponsorship because they cannot find a U.S. worker with those skill sets, which is frequently in the STEM fields. However, visa sponsorship comes with significant costs to the employer. Employers may be able to recover a portion of the immigration sponsorship fees by implementing what are called “clawback” provisions into their employment agreements. Clawback provisions are terms in the employment agreements that, in the event of a resignation by the employee before a certain date, require the employee to reimburse the employer for a portion of the costs or fees associated with his or her visa sponsorship.

Not All Visa Fees Can Be Clawed Back

But first, it’s important to understand which sponsorship fees and costs are potentially recoverable and which are prohibited from being “clawed back.”

  • H-1B Petition: Because these visas have a prevailing wage set by the U.S. Department of Labor (DOL) a H-1B employer may not clawback any attorney fees or government filing fees used to obtain the H-1B petition approval by U.S. Citizenship & Immigration Services (USCIS).
  • Other Visas: The same restriction applies to the Australian E-3 visa and the Singapore/Chile H-1B1 visas as well as the H-2A, H-2B, and J-1 visas.
  • PERM Labor Certification Sponsorship for Permanent Residency: PERM Is the most common method for an employer to sponsor a foreign national employee for permanent residency (green card). It is done by conducting recruitment and proving to DOL that no qualified U.S. worker applied for the position. An employer is required to pay for all of the fees and costs associated with the PERM process.
  • I-140 Immigrant Petition: After DOL certifies the PERM application and agrees that no qualified U.S. worker is available, the employer must file an I-140 immigrant petition with USCIS. The attorney fees and costs for the I-140 may be clawed back. The purpose of the I-140 immigrant petition is for the employer to prove to USCIS that the foreign national has the required education, experience and special skills outlined in the PERM filing with DOL. In addition, the I-140 includes financial documents showing that the employer has the ability to pay the offered wage.
  • I-485 Adjustment of Status to Permanent Resident filing: The employer may clawback the fees and costs associated with the I-485 adjustment of status application (green card).

Practice Pointers

  • Still At Will: The clawback provisions should be in writing. It should also indicate that the employment is still at will, if applicable.
  • Final Paycheck: The majority of states, including California, do not allow an employer to deduct anything from a final paycheck without the express consent of the employee. This includes fees and costs pursuant to the clawback provision.
  • Deterrence: Given that an employer cannot clawback from the final paycheck and suing a former employee to collect the amount in controversy is not always practical, a clawback provision can be used as a deterrence for early departure.

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Copyright © 2024, Sheppard Mullin Richter & Hampton LLP.

Major Changes Coming for Medicare Drug Program: Negotiated Prices, Cap on Out of Pocket and Creditable Coverage

Some major changes are on the way for Medicare beneficiaries regarding drug costs. Due to the Inflation Reduction Act, the federal government now will have the ability to negotiate the prices of drugs for Medicare beneficiaries. After an initial set of negotiations, new lower prices have been announced for 10 expensive drugs. The discounts for some blood thinners and drugs for arthritis, cancer, diabetes, and heart failure result in costs as much as 79% lower. The new drug prices will go into effect starting in 2026. Just these 10 drugs make up about 20% of the program’s drug spending, so the impact is huge for the medicinal market. The federal government will turn to negotiating another batch of drugs in 2025, with 15-20 drugs targeted annually.

Another major change under the Inflation Reduction Act will be the out-of-pocket maximum under all Medicare Part D plans of $2,000 per year beginning January 2025. Beneficiaries will be able to prorate the cost monthly or pay it as the costs are incurred. This will be a game changer for many Medicare beneficiaries with high drug costs. In addition, certain drugs covered by Part B (typically those administered in a doctor’s office or hospital) might incur a co-pay of less than the standard 20% if the prices have increased faster than inflation. The drugs subject to reduced copays will be published quarterly.

These changes may have an unintended consequence for Medicare-eligible individuals who are still working and therefore enrolled in employer plans, or other individuals enrolled in retiree or other private plans. Those who are Medicare eligible but are enrolled in non-Medicare plans must show that they have “creditable” coverage under Medicare standards. A plan is “creditable” if coverage is at least as good as or better than the Medicare drug benefit. Creditable coverage is based on a test that measures whether the expected amount of paid claims is at least as much as the standard Part D benefit. Non-Medicare plans must advise enrollees if their coverage is considered “creditable.” It is crucial for coverage to be considered “creditable;” otherwise, the Medicare beneficiary can be subject to a Late Enrollment Penalty (LEP) for each month they are not enrolled in a plan providing creditable coverage.

It is unclear whether the $2,000 cap coming to Part D plans or other changes in drug coverage will mean that non-Medicare plans that do not match the changes will continue to be considered creditable in the future. Beneficiaries need to be aware of this important issue when considering their coverage options.

©2024 Norris McLaughlin P.A., All Rights Reserved
For more on the Medicare Drug Program, visit the NLR Health Law Managed Care section

In Rare Summer Opinion, Supreme Court Follows Sixth Circuit’s Lead

In Department of Education v. Louisiana, the Supreme Court issued a rare August opinion to maintain two preliminary injunctions that block the Department of Education’s new rule.  That rule expands Title IX to prevent sexual-orientation and gender-identity discrimination.  State coalitions brought challenges; district courts in Louisiana and Kentucky enjoined the rule during the litigation; the Fifth and Sixth Circuits denied the government’s requests to stay the injunctions, nor would the Supreme Court intercede for the government.

All the Justices agreed that aspects of the rule warranted interim relief, most centrally the “provision that newly defines sex discrimination” to include sexual-orientation and gender-identity discrimination.  But because the district courts enjoined the entirety of the rule, the scope of relief proved divisive.  A narrow majority agreed to leave the broad injunctions in place, while four Justices in dissent argued to sever the suspect aspects of the rule and allow the remainder of the rule to take effect.  With emphasis on the “emergency posture,” the majority explained that the government had not carried its burden “on its severability argument.”

Justice Sotomayor’s dissent proposed limiting the injunctions to just the three challenged aspects of the rule.  The dissent focused on the “traditional” limits on courts’ power to fashion “equitable remedies.”  That Justice Gorsuch joined Justices Sotomayor, Kagan, and Jackson should come as no surprise.  Justice Gorsuch has harped on limiting equitable remedies to party-specific relief (e.g. Labrador v. Poe); cast doubt on severability doctrine (Barr v. AAPC (opinion concurring in part and dissenting in part)); and, of course, authored the landmark Bostock v. Clayton County decision that interpreted Title VII to protect against sex discrimination in much the same way the Department wishes to interpret Title IX.

This decision is an unreliable forecast of the Court’s view of what Title IX sex discrimination encompasses.  The Court unanimously agreed to table the debate over the Department’s new definition of sex discrimination while the lower courts proceed “with appropriate dispatch.”  The case concerned the status of the rest of the rule as that litigation continues.

A truer tell on the merits is the Sixth Circuit panel’s order denying the government’s stay request.  The panel found it “likely” “that the Rule’s definition of sex discrimination exceeds the Department’s authority.”  Preliminarily at least, the court thought it unlikely that Title IX—last amended in 1972—addresses sexual-orientation and gender-identity discrimination.  The Sixth Circuit has been reluctant “to export Title VII’s expansive meaning of sex discrimination to other settings”—and so it was here.

If “past is not always prologue,” still sometimes it is.  The Sixth Circuit panel divided on the injunction’s scope just like the Supreme Court.  Chief Judge Sutton and Judge Batchelder formed the majority, finding that the three “central provisions of the Rule . . . appear to touch every substantive provision.”  Saddling school administrators with new regulatory requirements on the eve of the new schoolyear tipped the equities toward enjoining the full rule.  Judge Mathis dissented because the injunction disturbed provisions of the rule “that Plaintiffs have not challenged.”

For now, the Department’s new rule yields to the old one.  That rule, too, is being litigated in the Sixth Circuit because guidance documents say the Department will interpret Title IX the same way Bostock interpreted Title VII.  See Tennessee v. Dep’t of Educ. and this coverage at the Notice & Comment blog.  To close out with some Supreme Court trivia—this marks its first mid-summer opinion since Alabama Association of Realtors v. DHHS in 2021, where the Court ended the Biden Administration’s Covid-era moratorium on evictions.  Before that may be the Court’s September 2012 decision Tennant v. Jefferson County Commission involving a challenge to West Virginia’s congressional districts.

© Copyright 2024 Squire Patton Boggs (US) LLP
For more news on SCOTUS Decision in Department of Education v. Louisiana, visit the NLR Public Education Services section.

Litigation Against Pharmacy Benefit Managers

Pharmacy Benefit Managers (PBMs) play a large role in the pharmaceutical medication distribution industry and have faced a great deal of litigation in recent years. This blog entry looks at cases against PBMs brought under the U.S. False Claims Act (FCA), as well as those brought as class actions on behalf of various kinds of groups.

FCA Actions

Cases brought against PBMs under the FCA typically involve allegations of fraudulent billing practices, false statements, and kickback schemes. These cases often address whether PBMs have caused false claims to be submitted to government healthcare programs, such as Medicaid, and whether they have engaged in practices that violate the FCA and other related statutes.

First, PBMs may violate the FCA by failing to pay reimbursements to individuals, other business entities, and/or state or federal agencies. In United States v. Caremark, Inc., the U.S. Court of Appeals for the Fifth Circuit held that the district court erred in finding that the Defendant PBM did not impair an obligation to the government within the meaning of the FCA by unlawfully denying reimbursement requests from state Medicaid agencies.

Second, PBMs may violate the FCA by billing individuals, other business entities, and/or state or federal agencies for services that were never rendered. In United States ex rel. Hunt v. Merck-Medco Managed Care, L.L.C., the U.S. District Court for the Eastern District of Pennsylvania addressed allegations that the PBM billed for services not rendered and fraudulently avoided contractual penalties it would otherwise have had to pay. The Court found that the Complaint sufficiently alleged that the PBM caused false claims to be presented to an agent of the United States, satisfying the statutory requirements of the FCA.

Third, PBMs may violate the FCA by overcharging individuals, other business entities, and/or state or federal agencies for services. For example, in two cases that were settled in 2019 in the Western District of Texas and the Northern District of Iowa, two subsidiaries of Fagron Holding USA LLC settled with the U.S. for over $22 million in connection with such a scheme. In the first, Fagron subsidiary Pharmacy Services Inc. (PSI) and its affiliates were accused of submitting fraudulent compound prescription claims to federal healthcare programs, manipulating pricing through sham insurance programs, paying kickbacks to physicians, and illegally waiving copays. In the second, Fagron subsidiary B&B Pharmaceuticals Inc. faced claims under the FCA for setting an inflated average wholesale price for Gabapentin.

Finally, PBMs may violate the FCA by engaging in kickback schemes with drug manufacturers or other entities. These schemes may also involve waiving copays and the provision of unnecessary services to patients. One notable case involves AstraZeneca LP, a pharmaceutical manufacturer, which agreed to pay $7.9 million to settle allegations that it engaged in a kickback scheme with Medco Health Solutions, a PBM. The allegations included providing remuneration to Medco in exchange for maintaining exclusive status of AstraZenica’s heartburn relief drug Nexium on certain formularies, which led to the submission of false claims to the Retiree Drug Subsidy Program. Similarly, Sanford Health and its associated entities agreed to pay $20.25 million to resolve FCA allegations related to false claims submitted to federal healthcare programs. The allegations included violations of the Anti-Kickback Statute and medically unnecessary spinal surgeries, with one of Sanford’s top neurosurgeons receiving kickbacks from his use of implantable devices distributed by his physician-owned distributorship.

Class Actions

Class action cases against pharmacy benefit managers (PBMs) often involve allegations of deceptive practices, breach of fiduciary duty, and violations of contractual obligations. These cases typically involve issues such as the improper handling of rebates, kickbacks, inflated drug costs, and the failure to act in the best interest of plan participants.

First, PBMs may subject themselves to liability by failing to pass on negotiated rebates or other types of savings to their members. In Corr. Officers’ Benevolent Ass’n of the City of N.Y. v. Express Scripts, Inc., a union alleged that PBM managers failed to pass on negotiated rebates to its members, instead keeping them for their own benefit. The court found sufficient allegations to support claims of deceptive practices and breach of fiduciary duty, allowing these claims to proceed.

Second, and far more commonly, PBMs face liability for engaging in antitrust violations. Such liability typically arises when PBMs collude with one another to fix drug processes or otherwise improperly influence the market for medications and/or other medical services. For example, in In re Brand Name Prescription Drugs Antitrust Litig., a class of retail pharmacies alleged that drug manufacturers and wholesalers conspired to deny them discounts. The court found sufficient evidence of violations to proceed to trial. Similarly, in Independent Pharmacies vs. OptumRx, more than 50 independent pharmacies filed a class action lawsuit against OptumRx, a division of UnitedHealth Group, alleging that OptumRx failed to comply with state pharmacy claims reimbursement laws, leading to illegal price discrimination and reimbursement violations. Lastly, in Elan and Adam Klein, Leah Weav, et. al v. Prime Therapeutics, Express Scripts, and CVS Health, the Plaintiffs brought a action lawsuit against three major PBMs – Prime Therapeutics, Express Scripts, and CVS Health – on behalf of EpiPen purchasers with ERISA health plans for contributing to EpiPen price inflation through rebates and breaching their fiduciary duty to plan members.

*****

In short, because PBMs play such a large role in the pharmaceutical medication distribution industry, there are many ways that they can subject themselves to liability under the FCA, pursuant to a class action, or otherwise. As the place of PBMs in this marketplace continues to grow, we can expect that litigation against them will do likewise. Potential plaintiffs seeking to bring claims against a PBM should consult with an experienced attorney in order to determine all of the causes of action that may be available to them.

_______________________________________________

1United States v. Caremark, Inc., 634 F.3d 808 (5th Cir. 2011).
2United States ex rel. Hunt v. Merck-Medco Managed Care, L.L.C., 336 F. Supp. 2d 430 (E.D. Pa. 2004).
3 Corr. Officers’ Benevolent Ass’n of the City of N.Y. v. Express Scripts, Inc., 522 F. Supp. 2d 1132.
4In re Brand Name Prescription Drugs Antitrust Litig., 123 F.3d 599.

© 2023 Young Law Group. All rights reserved
For more news on Litigation against PBMs, visit the NLR Litigation Trial Practice section.