The National Law Forum

FTC Staff Issue Report on Multi-Level Marketing Income Disclosure Statements

On September 4, 2024, the Federal Trade Commission announced that it has issued a report that details findings from a review of income disclosure statements from 70 different multi-level marketers (MLMs).

Staff reviewed income disclosure statements in February 2023 that were publicly available on the websites of a wide array of MLMs, from large household names to smaller, less well-known companies, according to FTC attorneys. “These statements are sometimes provided to consumers who are considering joining MLMs, and often purport to show information about income that recruits could expect to receive.”

According to the report, FTC staff found a number of issues with the statements they reviewed, including that most omit key information when calculating the earnings amounts they present. Specifically, the report notes that most of the reviewed statements do not include participants with low or no earnings in their display of earnings amounts and also don’t account for the expenses faced by participants, which can outstrip the income they make. The report notes that these omissions are often not plainly disclosed in the income statements.

The report also notes that most statements emphasize the high earnings of a small group of participants, and many entirely omit or only inconspicuously disclose key information about the limited earnings made by most participants. In addition, the staff report notes that most of the disclosure statements staff reviewed present earnings information in a potentially confusing way, “like giving average earnings amounts for groups that could have very different actual incomes, or using annual income figures that aren’t based on what an actual group of participants made for the year.”

The report also notes based on staff’s analysis of data in the income disclosure statements, including information included in fine print, that many participants in those MLMs received no payments from the MLMs, and the vast majority received $1,000 or less per year—that is, less than $84 per month, on average.

“The FTC staff report documents an analysis of 70 publicly available income disclosure statements from a wide range of MLMs — big and well-known to smaller companies. The report found that these income disclosure statements showed most participants made $1,000 or less per year — that’s less than $84 dollars per month. And that may not account for expenses. In at least 17 MLMs, most participants didn’t make any money at all.”

As referenced above, the staff report documents (and provides numerous examples of) how most of the publicly available MLM income disclosure statements used all the following tactics:

Emphasizing the high dollar amounts made by a relatively small number of MLM participants.
Leaving out or downplaying important facts, like the percentage of participants who made no money.
Presenting income data in potentially confusing ways.
Ignoring expenses incurred by participants — even though expenses can, and in some MLMs often do, outstrip income.

President Biden Signs Executive Order Directing Agencies to Prioritize Pro-Union and Union Neutrality Policies

On September 6, 2024, President Biden signed an Executive Order on Investing in America and Investing in American Workers (the “Order”), that, among other things, aims to provide “incentives for federally assisted projects with high labor standards – including collective bargaining agreements, project labor agreements, and certain community benefits agreements.” Specifically, the Order directs federal agencies to prioritize projects that provide “high labor standards” for “Federal financial assistance,” which is defined as “funds obtained from or borrowed on the credit of the Federal Government pursuant to grants (whether formula or discretionary), loans, or rebates, or projects undertaken pursuant to any Federal program involving such grants, loans, or rebates.”

The Order expressly instructs agencies to prioritize projects that “provide a clear plan for efficient project delivery by promoting positive labor-management relations.” This includes project labor agreements, collective bargaining agreements, community benefits agreements, and other “agreements designed to facilitate first collective bargaining agreements, voluntary union recognition, and neutrality by the employer with respect to union organizing.”

In addition, the Order directs agencies to prioritize projects that: (i) “enhance worker productivity by promoting family-sustaining wages”; (ii) supply particular benefits, including paid leave (e.g., paid sick, family, and medical leave), healthcare benefits, retirement benefits, and child, dependent, and elder care; (iii) enact policies designed to combat discrimination that impacts workers from underserved communities; (iv) expand worker access to high-quality training and credentials that will “lead to good jobs” and strengthen workforce development; and (v) promote and protect worker health and safety. Per the Order, projects that use, among other things, union pattern wage scales, joint labor-management partnerships to invest in “union-affiliated training programs, registered apprenticeships, and pre-apprenticeship programs,” or policies that encourage worker and union participation in the design and implementation of workplace safety and health management systems, will assist in satisfying the goal of achieving “high labor standards” and should be prioritized.

To effectuate the Order’s priorities, agencies are instructed to consider including application evaluation criteria or selection factors that will prioritize those applicants for federal assistance that adopt or provide a specific plan to adopt the priorities set forth in the Order. Agencies also must consider, among other things, publishing relevant guidance, such as best practice guides, engaging more deeply with applicants prior to any award of federal assistance “to ensure that applicants understand the benefits of [the Order’s] priorities for key programs and projects,” and collecting relevant data to evaluate and monitor the progress of funding recipients in satisfying the Order’s goals.

The “implementing agencies,” or the agencies subject to the Order, are the Department of the Interior, the Department of Agriculture, the Department of Commerce, the Department of Labor, the Department of Housing and Urban Development, the Department of Transportation, the Department of Energy, the Department of Education, the Department of Homeland Security, and the Environmental Protection Agency.

Finally, the Order creates a task force, referred to as the Investing in Good Jobs Task Force, that will be co-chaired by the Secretary of Labor and the Director of the National Economic Council, or their designees, and will oversee implementation of the Order’s labor standards in funding decisions by the implementing agencies.

The White House also issued a Fact Sheet (available here) discussing the Order and President Biden’s motivation for its enactment. It remains to be seen what impact the Order will have on the implementing agencies or how those agencies may alter their funding programs to comply with the Order. We will continue to monitor these developments and will keep you informed as to any new updates.

Consumer Privacy Update: What Organizations Need to Know About Impending State Privacy Laws Going into Effect in 2024 and 2025

Over the past several years, the number of states with comprehensive consumer data privacy laws has increased exponentially from just a handful—California, Colorado, Virginia, Connecticut, and Utah—to up to twenty by some counts.

Many of these state laws will go into effect starting Q4 of 2024 through 2025. We have previously written in more detail on New Jersey’s comprehensive data privacy law, which goes into effect January 15, 2025, and Tennessee’s comprehensive data privacy law, which goes into effect July 1, 2025. Some laws have already gone into effect, like Texas’s Data Privacy and Security Act, and Oregon’s Consumer Privacy Act, both of which became effective July of 2024. Now is a good time to take stock of the current landscape as the next batch of state privacy laws go into effect.

Over the next year, the following laws will become effective:

Montana Consumer Data Privacy Act (effective Oct. 1, 2024)
Delaware Personal Data Privacy Act (effective Jan. 1, 2025)
Iowa Consumer Data Protection Act (effective Jan. 1, 2025)
Nebraska Data Privacy Act (effective Jan. 1, 2025)
New Hampshire Privacy Act (effective Jan. 1, 2025)
New Jersey Data Privacy Act (effective Jan. 15, 2025)
Tennessee Information Protection Act (effective July 1, 2025)
Minnesota Consumer Data Privacy Act (effective July 31, 2025)
Maryland Online Data Privacy Act (effective Oct. 1, 2025)

These nine state privacy laws contain many similarities, broadly conforming to the Virginia Consumer Data Protection Act we discussed here. All nine laws listed above contain the following familiar requirements:

(1) disclosing data handling practices to consumers,

(2) including certain contractual terms in data processing agreements,

(3) performing risk assessments (with the exception of Iowa); and

(4) affording resident consumers with certain rights, such as the right to access or know the personal data processed by a business, the right to correct any inaccurate personal data, the right to request deletion of personal data, the right to opt out of targeted advertising or the sale of personal data, and the right to opt out of the processing sensitive information.

The laws contain more than a few noteworthy differences. Each of the laws differs in terms of the scope of their application. The applicability thresholds vary based on: (1) the number of state residents whose personal data the company (or “controller”) controls or processes, or (2) the proportion of revenue a controller derives from the sale of personal data. Maryland, Delaware, and New Hampshire each have a 35,000 consumer processing threshold. Nebraska, similar to the recently passed data privacy law in Texas, applies to controllers that that do not qualify as small business and process personal data or engage in personal data sales. It is also important to note that Iowa adopted a comparatively narrower definition of what constitutes as sale of personal data to only transactions involving monetary consideration. All states require that the company conduct business in the state.

With respect to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), Iowa’s, Montana’s, Nebraska’s, New Hampshire’s, and Tennessee’s laws exempt HIPAA-regulated entities altogether; while Delaware’s, Maryland’s, Minnesota’s, and New Jersey’s laws exempt only protected health information (“PHI”) under HIPAA. As a result, HIPAA-regulated entities will have the added burden of assessing whether data is covered by HIPAA or an applicable state privacy law.

With respect to the Gramm-Leach-Bliley Act (“GLBA”), eight of these nine comprehensive privacy laws contain an entity-level exemption for GBLA-covered financial institutions. By contrast, Minnesota’s law exempts only data regulated by GLBA. Minnesota joins California and Oregon as the three state consumer privacy laws with information-level GLBA exemptions.

Not least of all, Maryland’s law stands apart from the other data privacy laws due to a number of unique obligations, including:

A prohibition on the collection, processing, and sharing of a consumer’s sensitive data except when doing so is “strictly necessary to provide or maintain a specific product or service requested by the consumer.”
A broad prohibition on the sale of sensitive data for monetary or other valuable consideration unless such sale is necessary to provide or maintain a specific product or service requested by a consumer.
Special provisions applicable to “Consumer Health Data” processed by entities not regulated by HIPAA. Note that “Consumer Health Data” laws also exist in Nevada, Washington, and Connecticut as we previously discussed here.
A prohibition on selling or processing minors’ data for targeted advertising if the controller knows or should have known that the consumer is under 18 years of age.

While states continue to enact comprehensive data privacy laws, there remains the possibility of a federal privacy law to bring in a national standard. The American Privacy Rights Act (“APRA”) recently went through several iterations in the House Committee on Energy and Commerce this year, and it reflects many of the elements of these state laws, including transparency requirements and consumer rights. A key sticking point, however, continues to be the broad private right of action included in the proposed APRA but absent from all state privacy laws. Only California’s law, which we discussed here, has a private right of action, although it is narrowly circumscribed to data breaches. Considering the November 2024 election cycle, it is likely that federal efforts to create a comprehensive privacy law will stall until the election cycle is over and the composition of the White House and Congress is known.

The BR International Trade Report: September 2024

Welcome to this month’s issue of The BR International Trade Report, Blank Rome’s monthly digital newsletter highlighting international trade, sanctions, cross-border investment, geopolitical risk issues, trends, and laws impacting businesses domestically and abroad.

Recent Developments

BIS issues export controls targeting GAAFET, quantum, additive manufacturing, and other emerging technologies.
On September 5, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued new export controls covering gate all-around field effect transistor (“GAAFET”) technology, quantum computing items, advanced semiconductor manufacturing equipment, additive manufacturing equipment, and aerospace coating systems technology. The BIS rule establishes an export licensing requirement for the export of any such covered item to any destination in the world, as well as a new license exception authorizing export to certain specified “like-minded” countries that have implemented similar controls. See our alert.

Canada announces 100 percent tariff on Chinese EVs, while China retaliates with probe into imports of Canadian canola.
Canada’s electric vehicle (“EV”) tariff follows similar measures by the United States and the European Union, based on claims that China subsidizes its EV industry and thus has an “unfair advantage,” in the words of Canadian Prime Minister Justin Trudeau. Following the announcement of the tariff, China announced an antidumping investigation regarding imports of Canadian-origin canola.

BIS proposes rule establishing reporting requirements for AI developers and cloud providers.
On September 9, BIS issued a notice of proposed rulemaking outlining new requirements for developers of powerful AI models and computing clusters to report certain information to the U.S. government. Reportable information would include development activity, cybersecurity measures, and results of “red-team” testing to identify capabilities for illicit uses such as cyberattacks and development of chemical, biological, radiological, or nuclear weapons. The deadline for comments on the proposal is October 11.

United States implements AUKUS through ITAR exemptions for Australia and the United Kingdom.
On August 16, 2024, the U.S. Department of State announced a broad exemption from export licensing requirements under the International Traffic in Arms Regulations (“ITAR”) for most defense trade involving “authorized users” in the United States, Australia, and the United Kingdom. The ITAR relief was the linchpin of implementation of the AUKUS security pact between the three defense partners. See our alert.

Canada seeks public input on United States-Mexico-Canada Agreement (“USMCA”).
Canada has asked for public input on what Canadian priorities should be in the upcoming trilateral review of the USMCA in 2026. Unlike the previous North American Free Trade Agreement, the USMCA provides for a review at least every six years to assess how the agreement is doing and whether it should continue. Canada is inviting input on key areas that “are working well and potential areas for improvement.” Comments are due by October 31, 2024.

United States to dispute Canadian Digital Services Tax in USMCA.
The United States will challenge Canada’s new tax on digital services in a dispute under the USMCA. Canada imposes a tax on online revenues from companies that have a large global presence (€ 750 million in revenues) as well as Canadian digital revenue of $20 million (US$15 million). The U.S. claims that the tax unfairly discriminates against U.S. businesses. The first step will be consultations between the U.S. and Canadian governments. If a resolution cannot be reached, the U.S. may then request a formal dispute resolution panel. Governments have also been negotiating for years at the Organization for Economic Cooperation and Development (“OECD”) for an agreed regime to govern these taxes, and those negotiations are ongoing.

Xi Jinping touts U.S.-China “traditional friendship.”
In a meeting with U.S. National Security Advisor Jake Sullivan on August 29, Chinese leader Xi Jinping spoke of China’s interest in preserving stability in U.S.-China relations, referred to the “traditional friendship” between the two countries, and asked Sullivan to pass on his regards to President Biden. Sullivan reported after the meeting that he reassured Xi that the United States seeks to maintain stable ties, but also pressed the issues of de-escalation in the South China Sea and concerns over U.S. election interference.

The Netherlands adopts new export controls on semiconductor manufacturing equipment (“SME”), while Japan anticipates robust SME sales to China.
The Dutch government announced new controls on exports of certain advanced SME on national security grounds, reportedly bringing Dutch law in line with U.S. restrictions, a move that China blamed on U.S. “coercion.” Meanwhile, reports indicate that Japanese SME companies are counting on significant revenue from Chinese customers, even amidst heightened U.S. export controls, based on sales of SME for less advanced legacy chips that are used in cars and not in smartphones or advanced AI applications.

Huawei reportedly planning to unveil AI chip.
Reports indicate that Chinese telecom giant Huawei is nearing a release of an artificial intelligence chip, the Ascend 910C, that supposedly is comparable to high-end U.S. AI chips. The potential development comes as intense U.S. export controls aim to restrict the flow to China of advanced semiconductors that power the AI technology stack, and likely will prompt calls by Congress and national security thought leaders to consider continued calibration of U.S. policy in addressing technology-related national security challenges.

Federal study recommends that Pentagon engage with commercial chipmakers.
A report by the National Academies of Sciences, Engineering, and Medicine found that the U.S. Department of Defense (“DoD”) “currently lacks an overarching microelectronics strategy.” The report recommends that the DoD work more closely with the semiconductor industry, as it did in the latter half of the 20^th century, and partner with civilian agencies such as the U.S. Department of Commerce in order to ensure a reliable supply of semiconductors for national defense.

China implements new export controls for antimony and revises controls for drones.
China recently updated its export controls amidst escalating volleys of trade controls between the United States and China. First, China issued restrictions on exports of antimony, a key input in military items such as missiles, nuclear weapons, night vision goggles, and ammunition. Furthermore, China is adjusting its export controls over drones to lift temporary export controls over certain consumer drones, adjust standards for other controlled items, and add certain high-precision measurement equipment to its control list.

Biden Administration crafting plan for a U.S. sovereign wealth fund (“SWF”). National Security Advisor Sullivan reportedly is working on a proposal for a U.S. SWF that would support investments in emerging technologies and critical minerals, in an effort to keep pace with countries like China and Singapore, which have invested aggressively through SWFs. The plan is similar to a recent proposal by former President Trump, suggesting there could be bipartisan support for the measure.

United States considers price support for critical minerals projects.
Reports indicate that the Biden Administration is considering price support for certain U.S. critical minerals projects, in response to an influx of less costly Chinese lithium, nickel, and other minerals, and delays and cancellations of several U.S. minerals processing projects. Specifically, the administration reportedly is considering the establishment of a price floor for a limited time, with the U.S. Department of Energy paying the difference when market prices fall below the floor. The mechanism would be intended to assure investors and customers that domestic suppliers can thrive.

OFAC extends recordkeeping requirements from five to 10 years.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued an interim final rule extending the recordkeeping requirement under economic sanctions regulations from five years—which had been the requirement for decades—to 10 years. The measure is consistent with the recent extension of the statute of limitations for sanctions violations from five years to 10 years. See our prior alerts.

BIS expands export controls against Russia and Belarus.
BIS issued measures on August 23 that (i) expanded the scope of the Russia/Belarus Military End User and Procurement Foreign Direct Product rule; (ii) added 123 entities to the Entity List; (iii) added four high-diversion risk addresses to the Entity List to target diversion through shell companies; and (iv) issued new guidance to exporters on contractual language restricting exports to Russia and Belarus.

United States International Trade Commission (“USITC”) proposes quota on textile materials.
The four commissioners of the USITC unanimously recommended that the President impose a four year tariff-rate quota on imports of fine denier polyester staple fiber (“PSF”), to address serious injury to the U.S. domestic industry. Fine denier PSF is used in the production of textiles and other products such as diapers, baby wipes and coffee filters. The USITC recommends that a number of countries be excluded from this quota, primarily free trade partners of the United States. The President has the final decision on whether or not to impose a tariff-rate quota.

In Case You Missed It…

DDTC Issues Long-Awaited Rule Implementing AUKUS: Five Key Takeaways
On August 16, 2024, the U.S. Department of State announced a broad exemption from export licensing requirements for most defense trade between and among “authorized users” in the United States, Australia, and the United Kingdom, thereby issuing much-anticipated export control relief in implementation of the AUKUS security pact. Read More >>

BIS Issues New Export Controls Targeting GAAFET, Quantum, and Additive Manufacturing, and Ushers in New Age of Plurilateral Export Controls: 5 Key Takeaways
The U.S. Department of Commerce’s Bureau of Industry and Security recently issued an interim final rule under the Export Administration Regulations imposing licensing requirements for exports to all destinations worldwide of certain gate all-around field effect transistor technology, quantum computing items, advanced semiconductor manufacturing equipment, additive manufacturing equipment, and aerospace coating systems technology. Read More >>

October 2024 Visa Bulletin – New Fiscal Year, Mostly the Same Old Story

The State Department has published the much-anticipated October Visa Bulletin, the first issue of Fiscal Year 2025. Although the new year brings a brand new allotment of visa numbers in all categories, not much has changed since last month, with one exception in the All Countries category.

Below is a summary that includes Final Action Dates and changes from the previous month, but first – some background if you’re new to these blog posts. If you’re an old hand at the Visa Bulletin, feel free to skip the next paragraph.

The Visa Bulletin is released monthly by the US Department of State (in collaboration with US Citizenship and Immigration Services). If your priority date (that is, the date you got a place on the waiting list) is earlier than the cutoff date listed in the Bulletin for your nationality and category, that means a visa number is available for you that month. That, in turn, means you can submit your DS-260 immigrant visa application (if you’re applying at a US embassy abroad) or your I-485 adjustment of status application (if you’re applying with USCIS). If you already submitted that final step and your category then retrogressed, it means the embassy or USCIS can now approve your application because a visa number is again available.

Now for the October VB –

There are few changes from September for China:

EB-1 progresses 1 week to November 8, 2022m and EB-2 3 weeks to March 22, 2020
EB-3 Professionals retrogresses 5 months to April 1, 2020
EB-3 Other Workers stays stalled at January 1, 2017

Likewise, limited movement for India:

EB-1 remains stuck at February 1, 2022, and EB-2 at July 15, 2012
EB-3 Professionals and EB-3 Other Workers both advance 10 days to November 1, 2012

For All Other Countries, no changes except one dramatic one for EB-3:

EB-1 remains current
EB-2 remains stalled at March 15, 2023
EB-3 Professionals leaps almost 2 years, to November 15, 2022, making up last month’s retrogression of 1 year and gaining almost another year
EB-3 Other Workers stays stuck at January 1, 2020

NOTE 1: USCIS will accept I-485 applications in October based on the Department of State’s more favorable Dates for Filing chart, which allows from 2 months to 1 year of additional filing time depending on nationality and category:

Chinese nationals gain almost 2 months to file in EB‑1; a little over 6 months in EB-2; 7.5 months in EB‑3 Professionals; and 1 year in EB-3 Other Workers.
Indian nationals gain 2.5 months in EB-1; 5.5 months in EB-2; a little over 7 months in EB-3 Professionals; and 7 months in EB-3 Other Workers.
Nationals of all other countries may file their I-485s in advance of their priority dates being current by 4.5 months in EB-2; 3.5 months in EB-3 Professionals; and 5.75 months in EB-3 Other Workers.

NOTE 2: The Dates for Filing chart applies only to I-485 applications with USCIS. Immigrant visa applications with US embassies are always based on the Final Action Dates chart.

*Carol Schlenker also contributed to this article

EVERYTHING’S FINE: Big TCPA Win For Medical Debt Collector Suggests FCC Rulings Still Binding After Loper Bright–Let’s Hope it Stays That Way

Fascinating little case for you all today.

Consumer visits hospital for treatment. Provides phone number at admission. Receives treatment and is discharged.

Consumer fails to pay resulting invoices. Hospital and provider network turn account over to collections. Debt collector allegedly uses an ATDS to call consumer on the number she provided.

What result?

Prior to the Supreme Court’s Loper Bright decision the determination would be easy. The FCC held back in 2009 that providing a number in connection with a transaction permits autodialed calls to a consumer in connection with that transaction. And the Sixth Circuit Court of Appeals has directly held that providing a phone number on hospital intake documents permits later debt collection activity at that number–including via autodialer.

But the Loper Bright decision recently destroyed Chevron deference–meaning courts no longer have to yield to agency determinations of this sort. And while the Hobbs Act affords extra protections to certain FCC rulings, those protections only apply where certain procedural requirements were met by the Commission in adopting the rule.

So does the FCC’s rule from 2009 permitting informational calls to numbers provided in connection with a transaction still bind courts? According to the decision in Woodman v. Medicredit, 2024 WL 4132732 (D. Nv Sept. 9, 2024) the answer is yes!

In Woodman the defendant debt collector moved for summary judgment arguing the Plaintiff consented when she provided her number to the hospital. The Court had little problem applying the FCC’s 2009 order and precedent that came before Loper Bright to grant summary judgment to he defense. So just like that case is gone.

Great ruling for the defense, of course, and it makes me feel a bit better about the whole “no one knows what the law is anymore” thing, but the Woodman court didn’t really address the core issue– was the 2009 ruling enacted with sufficient APA pop and circumstance to merit Hobbs Act deference under PDR Resources.

Really interesting question and one folks should keep in mind.

USCIS Improvements Cut Naturalization Processing Time

USCIS is processing naturalization cases faster than they have in years, and the agency is managing to cut down on its naturalization backlog. Given the current average timing, eligible green card holders who applied early in the summer 2024 might be sworn in in time to vote in the upcoming November elections.

Of course, field offices vary in processing times, but USCIS stated it was effectively eliminating the net backlog of naturalization applications and reducing the median processing time from 10.5 months to as little as five months. This is a 50 percent drop in processing time since 2022, achieving the agency’s longstanding goal and significantly reducing waiting times for most individuals seeking U.S. citizenship. Naturalization has always been a target of note in the agency’s backlog reduction effort. This was achieved by increasing capacity, improving technology, and expanding staffing.

Naturalization cases often increase ahead of elections. Voting is not the only personal benefit of citizenship. Immigrants who become U.S. citizens may also serve on juries, travel on a U.S. passport, bring family members to the U.S. more easily, apply for certain federal jobs, run for federal office, become eligible for certain federal grants, scholarships and benefits, and, importantly, have the right to remain in the U.S. that cannot be taken away. Beyond that, findings show that naturalized citizens have higher employment rates and earn between 50 and 70 percent more than noncitizens. Increasing the number of citizens also helps the economy in general. It leads to an increase in tax revenue and greater home ownership.

When President Joe Biden came into office, he issued an executive order to reduce naturalization barriers to strengthen the integration of new Americans. About 100,300 naturalization petitions were denied in FY 2023, a 10 percent drop from the 111,600 petitions denied in FY 2022. The Biden Administration also made the naturalization application shorter and, while it raised the naturalization fee, a number of discounts are available.

Eligibility requirements for naturalization include age, continuous residence, physical presence, jurisdiction, knowledge of U.S. history, civics, and English, and good moral character.

Understanding Post-Bankruptcy Liquidation Trusts

A main goal in bankruptcy is to get in and out as quickly as possible to minimize costs. It is often the case that even though a substantial portion of a debtor’s assets have been liquidated in bankruptcy, some valuable assets will remain that can provide additional sources of recovery to creditors. These assets may include smaller pieces of real estate, accounts receivable, joint venture ownership interests, and claims and causes of action, among others.

In a chapter 11 case, the debtor exits bankruptcy by confirming a plan and having the plan go effective. When a debtor has assets remaining but is otherwise ready to exit the bankruptcy case – for example, because it has closed a sale of a substantial portion of its assets – the plan typically provides for the formation of a liquidation trust on the plan effective date. All remaining assets are transferred to the trust for liquidation, and any proceeds are distributed to creditors, i.e., the trust beneficiaries, in accordance with the plan.

The liquidation trust is established and governed by the plan and a liquidation trust agreement. A liquidation trustee is appointed to administer the trust and is granted broad powers to, among other things, liquidate assets, investigate, prosecute, and settle causes of action, object to, resolve, and pay claims, and make distributions to trust beneficiaries.

Trust beneficiaries typically appoint members of a trust advisory or oversight committee who have consultation and approval rights over certain actions proposed to be taken by the liquidation trustee. For example, the trustee may need approval from the oversight committee to resolve claims or causes of action above a certain amount, or to liquidate certain high-value assets.

Who serves as liquidation trustee and how many representatives each trust beneficiary appoints to the oversight committee are typically negotiated in connection with the plan process. The liquidation trustee may have been a professional involved in the bankruptcy, or it may be an outsider with experience serving in such a role. The oversight committee members may be creditors themselves or may be appointed as representatives of the creditors. Trust assets are typically used to compensate the liquidation trustee for its services and reimburse it for its costs and expenses, including for its retained professionals, though oftentimes initial seed funding is also required. Trust oversight committee members may receive modest compensation, which is typically capped, but which may offer an incentive for a creditor or a creditor-appointee to serve.

The role of the trust oversight committee is an important one, as the assets transferred to the trust may provide additional valuable sources of recovery to creditors. Trust beneficiaries are often creditors from different classes under the plan, and therefore may have differing interests and be entitled to different treatment. For example, a secured creditor with a lien on a parcel of real estate may be the sole beneficiary from the sale of such real estate, and therefore has an interest in overseeing how the property is marketed and sold. Even when trust beneficiaries share a right to recover from the same assets, such as from the prosecution of causes of action, they may have differing views or interests as to the potential value of the claims, whether it makes sense to settle them, and overall strategy.

When all assets are liquidated, claims resolved, distributions made, and the estates are otherwise wound down, the trust will be dissolved. Often, this does not occur until years later.

BIOSECURE Act: Anticipated Movement, Key Provisions, and Likely Impact

Last night, the House of Representatives passed the BIOSECURE Act (BIOSECURE or the Act) by a bipartisan vote of 306 to 81.

The BIOSECURE Act prohibits federal agencies from procuring or obtaining any biotechnology equipment or service produced or provided by a biotechnology company of concern. Subject to some exceptions, it also prohibits federal agencies from contracting with a company that uses equipment or services produced or provided by a biotechnology company of concern. Further, the Act prohibits recipients of a loan or grant from a federal agency from using federal funds to purchase equipment or services from a biotechnology company of concern.

The Senate version of BIOSECURE, sponsored by Sens. Gary Peters (D-MI) and Bill Hagerty (R-TN), was voted out of the Senate Committee on Homeland Security and Governmental affairs with bipartisan support in March 2024. Given its passage in the House last night, the BIOSECURE Act is likely to be signed into law by the end of the year. The House version of BIOSECURE is likely to be the version that becomes law. President Biden is unlikely to veto the Act given its bipartisan support, his previous executive actions to support domestic biotechnology development, and his Administration’s approach towards competition with China.

The Act defines “biotechnology company of concern” as any entity that:

is subject to the jurisdiction, direction, control, or operates on behalf of the government of a foreign adversary (defined as China, Cuba, Iran, North Korea, and Russia);
is involved in the manufacturing, distribution, provision, or procurement of a biotechnology equipment or service; and
poses a risk to U.S. national security based on:
- engaging in joint research with, being supported by, or being affiliated with a foreign adversary’s military, internal security forces, or intelligence agencies;
- providing multiomic data obtained via biotechnology equipment or services to the government of a foreign adversary; or
- obtaining human multiomic data via the biotechnology equipment or services without express and informed consent.

Somewhat unusually, the Act names specific Chinese companies as automatically qualifying as “biotechnology companies of concern”:

BGI (formerly known as the Beijing Genomics Institute);
MGI;
Complete Genomics;
WuXi AppTec; and
WuXi Biologics.

Both categories include any subsidiary, parent, affiliate, or successor entities of biotechnology companies of concern.

The Act also has very broad definitions of “biotechnology equipment or service.” The definition of equipment encompasses any machine, device, or subcomponent, including software that is “designed for use in the research, development, production, or analysis of biological materials.” The definition of services is similarly broad.

The BIOSECURE Act also requires the Office of Management and Budget (OMB) to publish a list of additional biotechnology companies of concern. The list is prepared by the Secretary of Defense in coordination with the Secretaries of the Departments of Health and Human Services, Justice, Commerce, Homeland Security, and State, as well as the Director of National Intelligence and National Cyber Director. This list of companies must be published by OMB within one year of BIOSECURE’s enactment and reviewed annually by OMB in consultation with the other Departments.

Guidance and Regulatory Authorities

OMB is also tasked with developing guidance and has 120 days from enactment of the statute to do so for the named companies. For the list of biotechnology companies of concern, OMB’s guidance must be established within 180 days after the development of the list.

Beyond OMB, the Act requires the Federal Acquisition Regulatory Council to revise the Federal Acquisition Regulation (FAR) to incorporate its prohibitions. The FAR regulations must be issued within one year of when OMB establishes its guidance.

For named companies the Act’s prohibitions are effective 60 days after the issuance of the FAR regulations. For companies placed on the biotechnology company of concern list, the effective date for the Act’s prohibitions is 80 days after the issuance of FAR regulations.

Impact on Existing Business Relationships

In response to stakeholder concerns about disrupting existing commercial relationships and triggering delays in drug development, the House version of the BIOSECURE Act provides a five-year unwinding period for contracts and agreements entered into before the Act’s effective dates. Contracts entered into after the Act’s effective dates do not qualify for the five year unwinding period.

Process for Designating Companies

BIOSECURE specifies the process for designating a biotechnology company of concern. Critically, the Act does not require OMB to notify a company prior to the Department of Defense making the designation. Rather, a company will receive notice that it is being designated and placed on the biotechnology company of concern list. Moreover, the criteria for listing will only be provided “to the extent consistent with national security and law enforcement interests.” Thus, companies may face a circumstance where they are not provided the evidence supporting their designation.

Once a company receives the notice, it will have 90 days to submit information and arguments opposing the listing. The Act does not require a hearing or any formal administrative process. If practicable, the notice may also include steps the company could take to avoid being listed, but it is not required.

Safe Harbor, Waivers and Exceptions

The Act only has one safe harbor for biotechnology equipment or services that were formerly but no longer provided or produced by a biotechnology company of concern. This safe harbor seems intended to allow a biotechnology company of concern to sell their ownership of a product or service to another company without prohibitions applying to the new owner.

Agency heads may waive the Act’s prohibitions on a case-by-case basis, but only with the approval of OMB acting “in coordination with the Secretary of Defense.” Waivers must be reported to Congress within 30 days of being granted. The waiver may last for up to a year with an additional “one time” extension of 180 days allowed if an agency head determines it is “in the national security interests of the United States.” The 180-day extension must be approved by OMB and the agency head must notify and submit a justification to Congress within 10 days of the waiver being granted.

The Act has only two exceptions. First, its prohibitions do not apply to intelligence activities. Second, the prohibitions do not apply to health care services provided to federal employees, members of the armed services, and government contractors who are stationed in a foreign country or on official foreign travel.

Impact and Considerations for Clients

1. Increased Risk of Partnerships with Chinese Companies and Researchers:

Pharmaceutical and biotechnology companies that receive federal funding or contract with federal agencies should be prepared to wind down business ties to biotechnology companies in China. Impacted companies need to begin evaluating the risk to their supply chains, manufacturing capacity, and R&D pipelines in the event a business partner is listed.

Universities in the United States and other research institutes that receive federal funding will also need to undertake a similar assessment of their research partners and collaborators based in China.

2. Loss of CDMO capacity:

Wuxi App Tec is a large, global provider of contract development and manufacturing (CDMO) services to the life sciences industry. According to the New York Times “[b]y one estimate Wuxi has been involved in developing one-fourth of the drugs used in the United States.” BIOSECURE would effectively ban Wuxi from conducting business in the United States, and if passed, risks causing delays, shortages, and cost increases as companies seek to transition to other CDMOs. It will likely take years for competitors to replace the lost CDMO capacity.

3. Fate of Wuxi U.S. Facilities:

Wuxi has a large presence in the United States. It operates 12 facilities and employs almost 2,000 people. Normally, Wuxi would be expected to sell its U.S.-based facilities. However, based on Tiktok’s experience, it is unclear if the Government of China will permit Wuxi to sell its facilities as opposed to dismantling and/or relocating facilities outside of the United States.

4. OMB’s Management of Biotechnology Companies of Concern List

OMB does not typically manage processes like the one envisioned by BIOSECURE. How OMB interprets the broad criteria for listing companies will be critical. Which Departments, beyond the Department of Defense, will have the greatest influence on OMB’s decision making and how open OMB is to evidence from companies seeking to avoid listing will also need to be watched closely. Until OMB starts preparing its guidance and the FAR regulations are proposed, it is hard to anticipate the rate at which new companies will be added to the list. How the process established by BIOSECURE will interact with or leverage existing entity lists will be another development to closely monitor.

5. Retaliation by China

BIOSECURE’s passage is likely to trigger a response from the Government of China. Responses could range from imposing its own export controls to using the country’s sweeping national security laws to harass United States businesses and their employees. Companies doing business in China, particularly those in the pharmaceutical or biotech industries need to be prepared.

Supreme Court Holds Life Insurance Proceeds Paid to Closely-Held Corporation to Fund Buy-Sell Agreement Increases Estate Tax on Deceased Shareholder’s Estate

In Connelly v. U.S., 144 S.Ct. 1406 (June 6, 2024), the United States Supreme Court upheld an estate tax deficiency of $889,914 in a decision that will impact many families and closely-held businesses. A Buy-Sell Agreement is often used to ensure that a closely-held company will remain within the family after the deaths of its owners or otherwise ensure the continuity of the business after an owner’s death. Many Buy-Sell Agreements, such as the one in Connelly, provide that upon the death of an owner, the surviving owner has the option to purchase the deceased owner’s interest in the company, and if the surviving owner declines, the company must redeem the deceased owner’s interest. To ensure that the company will have funds for the redemption, the company will often obtain life insurance for its owners. For years, planners thought it possible to structure such an arrangement so that life insurance proceeds would not increase the value of the company for estate tax purposes. However, in Connelly, the Court held that the life insurance proceeds paid to a corporation upon the death of a shareholder do increase the value of the corporation’s stock for estate tax purposes and that the corporation’s obligation under a Buy-Sell Agreement to redeem the deceased shareholder’s shares does not offset the life insurance proceeds. Under the Court’s decision, the type of entity does not appear to be relevant, and the holding will equally apply to partnerships and limited liability companies. Thus, if any Buy-Sell Agreement is structured as a redemption funded with entity-owned life insurance, the insurance proceeds may increase the value of the deceased business owner’s interest for estate tax purposes.

In Connelly, two brothers, Michael and Thomas Connelly, owned a business supply corporation. Michael owned 77.18% of the company, and Thomas owned 22.82% of the company. The brothers entered into a Buy-Sell Agreement as described above. The brothers ignored provisions under the agreement that required them to value the company annually and obtain an appraisal upon a shareholder’s death. After Michael’s death in 2013, Thomas and Michael’s son simply agreed to a redemption price of $3 million for Michael’s shares. The company used $3 million of life insurance proceeds to redeem Michael’s shares, and Thomas, as Michael’s executor, reported the value of Michael’s shares as $3 million on Michael’s estate tax return without completing an appraisal. Upon audit of the estate tax return, Thomas belatedly obtained an appraisal that determined the fair market value of 100% of the company at Michael’s death to be $3.86 million, excluding the life insurance proceeds. Based on the valuation of the company at $3.86 million, Thomas argued that the value of Michael’s ownership interest was $3 million ($3.86 million x 77.18%).

Connelly rejects the position of the 11^th Circuit Court of Appeals in Blount v. Comm’r., 428 F. 3d 1338 (CA11 2005), that the life insurance proceeds paid to a company are offset by the company’s contractual obligation to redeem a deceased owner’s interest. Rather than allowing an offset for the redemption obligation, the Court focused on the value of the company before and after the redemption. If the entire company was worth $3.86 million, as claimed in Connelly, the value of Michael’s 77.18% would be $3 million and the value of Thomas’ 22.82% would be $860,000. The Court reasoned that upon redemption of Michael’s shares, Michael’s estate would receive $3 million, leaving Thomas with 100% ownership of a company worth $860,000. However, Thomas’ argument meant that post-redemption, 100% of the company that Thomas owned was worth $3.86 million. The Court refused to accept that a company which pays out $3 million to redeem shares was worth the same overall amount before and after the redemption. The Court found that the company’s value should be increased from $3.86 to $6.86 million, accounting for the insurance proceeds, increasing the value of Michael’s ownership from $3 to approximately $5.3 million ($6.86 million × 77.18%). The net result was an additional estate tax of $889,914.

Although the implications of Connelly are wide, there are limitations to the Court’s decision. Connelly will have little impact on a business owner whose estate is well under the estate tax exemption, which is currently $13.61 million for each individual and scheduled to be decreased by 50% in 2026. In addition, the Court did not address the application of Section 2703 of the Internal Revenue Code, which provides in relevant part that the value of a deceased owner’s interest in a business may be established by a Buy-Sell Agreement if certain requirements are met. Perhaps the Court did not review Section 2703 because the shareholders did not follow the valuation terms of the Buy-Sell Agreement and arbitrarily determined the redemption price instead. But because Section 2703 was not addressed in Connelly, it may yet be possible to avoid its impact with a properly structured and adhered to, Buy-Sell Agreement.

The Court also explicitly stated in a footnote that the holding does not mean that a redemption obligation can never decrease a corporation’s value. The Court implies that if a company is required to sell an operating asset to redeem shares, the redemption obligation might reduce the company’s value.

The Court acknowledged that a differently structured Buy-Sell Agreement can avoid the risk that insurance proceeds would increase the value of a deceased shareholder’s shares. Specifically, the Court referenced a “cross-purchase agreement” in which business owners, rather than the company, agree to purchase the others’ ownership upon death using proceeds from non-company owned policies. In addition to avoiding the Connelly result, a cross-purchase agreement provides an increased tax basis for the surviving owners who purchase a deceased owner’s interests. However, the more owners a business has, the more complicated a life insurance-funded cross-purchase will be. Other options to avoid the Connelly result may include a life insurance partnership or limited liability company or creatively structured split-dollar arrangements.

After Connelly, all business owners with Buy-Sell Agreements funded with entity-owned life insurance, or with other entity-owned insurance vehicles (split-dollar plans, key-person life insurance, etc.) should evaluate and consider restructuring their arrangements. In some cases, the restructuring of a Buy-Sell Agreement may require the transfer of life insurance policies which raises other tax issues, such as in-kind corporate distributions, S corporation elections, transfer-for-value rules, and incidents of ownership.

The National Law Forum

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