Handling an EPA Inspection: What to Do Before, During, and After the Process

Regardless of a company’s environmental compliance record, facing a U.S. Environmental Protection Agency (EPA) inspection can present significant risks. When conducting inspections, EPA inspectors and technical personnel examine all aspects of companies’ operations, and it is up to companies to demonstrate that enforcement action is unwarranted. When faced with uncertainty, EPA personnel will err on the side of non-compliance with EPA regulations, and this means that companies that are unable to affirmatively demonstrate compliance can find themselves facing unnecessary consequences under federal environmental laws.

With this in mind, all companies need to take an informed, strategic, and systematic approach to defending against EPA inspections. While EPA inspections can present significant risks, companies can—and should—manage these risks effectively. Effectively managing the risks of an EPA inspection starts with understanding what companies need to do before, during, and after the process.

To be clear, while there are several steps that companies can—and generally should—take to prepare for their EPA inspections, there is no single “right” way to approach the inspection process. A custom-tailored approach is critical, as companies facing scrutiny from the EPA must be prepared to address any and all compliance-related concerns arising out of their specific operations.

What to Do Before an EPA Inspection

With this in mind, what can companies do to maximize their chances of avoiding unnecessary consequences during an EPA inspection? Here are five steps that companies should generally take upon learning of an impending visit from EPA personnel:

1. Make Sure You Know What Type of EPA Inspection Your Company is Facing 

One of the first steps to take is to ensure that you know what type of EPA inspection your company is facing. The EPA conducts multiple types of inspections, each of which involves its own protocols and procedures and presents its own risks and opportunities. As the EPA explains:

“Inspections are usually conducted on single-media programs such as the Clean Water Act, but can be conducted for more than one media program. Inspections also can be conducted to address a specific environmental problem (e.g., water quality in a river), a facility or industry sector (e.g., chemical plants), or a geographic (e.g., a region or locality) or ecosystem-based approach (e.g., air or watershed).”

Under the EPA’s current approach to environmental compliance enforcement, most inspections fall into one of five categories:

  • On-Site Inspections – The EPA routinely conducts on-site inspections. During these inspections, EPA personnel may observe the company’s operations, collect samples, take photos and videos, interview company personnel, and review pertinent environmental compliance documentation.
  • Evaluations – The EPA conducts evaluations to assess facility-level compliance under the various federal environmental statutes. These evaluations may be either “full” or “partial,” with full compliance evaluations (FCEs) examining all pertinent areas of compliance and partial compliance evaluations (PCEs) “focusing on a subset of regulated pollutants, regulatory requirements, or emission units at a given facility.”
  • Record Reviews – Record reviews typically take place at an EPA field office or other government location, and they “may or may not be combined with field work.” With that said, in many cases, on-site inspections and record reviews go hand-in-hand.
  • Information Requests – An information request is, “an enforceable, written request for information to a regulated entity, a potentially regulated entity, or a potentially responsible party about a site, facility, or activity.” The EPA uses information requests to “substantiate the compliance status of [a] facility or . . . site,” and the EPA may issue an information request either in connection with or after conducting an on-site inspection.
  • Civil Investigations – The EPA describes civil investigations as, “an extraordinary, detailed assessment of a regulated entity’s compliance status, which requires significantly more time to complete than a typical compliance inspection.” In most cases, a civil investigation will follow an inspection that uncovers significant or systemic compliance failures.

2. Make Sure You Understand the Scope of the EPA’s Inspection 

After discerning the nature of the EPA’s inquiry, the next step is to ensure that you understand its scope. Is the EPA focusing on a specific environmental statute (i.e., the Recovery Act, the Clean Air Act (CAA) or Clean Water Act (CWA)); or, is it conducting a comprehensive assessment of environmental compliance? If the EPA is focusing on a specific environmental statute, is it focusing on all areas of compliance monitoring under the statute, or is it focusing on a particular enforcement priority like resource conservation? Answering these types of questions will be critical for efficiently implementing an informed defense strategy.

3. Locate All Relevant Compliance Documentation 

Once you know what the EPA will be looking for, the next step is determining what it is going to find when they request information. This begins with locating all of the company’s relevant compliance documentation. This will facilitate conducting an internal EPA compliance assessment (more on this below), and it will also allow the company to efficiently respond to document requests and other inquiries during the inspection process.

4. Conduct an Internal EPA Compliance Assessment (if There is Time)

If there is time, it will be important to conduct an internal EPA compliance assessment, like a mock audit, before the EPA’s inspection begins—unless the company has recently completed a systematic environmental compliance audit in compliance with the relevant EPA Audit Protocols. There is incentive for self-policing which incentivizes you to voluntarily discover and fix violations. If there is not time to conduct an internal assessment before the inspection begins, then this should be undertaken in parallel with the company’s inspection defense, with a focus on accurately assessing the risks associated with the inspection as quickly as possible.

5. Put Together Your EPA Inspection Defense Strategy and Team 

Effectively responding to an EPA inspection requires an informed defense strategy and a capable team. A company’s EPA inspection defense team should include appropriate company leaders and internal subject matter experts as well as the company’s outside EPA compliance counsel.

What to Do During an EPA Inspection

Here are some important steps to take once an EPA inspection is underway:

1. Proactively Engage with the EPA’s Inspectors and Technical Personnel 

Companies facing EPA inspections should not take a back seat during the process. Instead, they should seek to proactively engage with the EPA’s inspectors and technical personnel (through their EPA compliance counsel) so that they remain fully up to speed and can address any potential issues or concerns as quickly as possible.

2. Use the Company’s EPA Compliance Documentation to Guide the Process 

For companies that have a strong compliance record and clear documentation of compliance, using this documentation to guide the inspection process can help steer it toward an efficient and favorable resolution.

3. Carefully Assess Any Concerns About Non-Compliance 

If any concerns about non-compliance arise during the EPA inspection process, company leaders should work with the company’s EPA compliance counsel to assess these concerns and determine how best to respond.

4. Work with the EPA’s Inspectors and Technical Personnel to Resolve Compliance Concerns as Warranted 

If any of the EPA’s concerns about non-compliance are substantiated, companies should work with the EPA’s inspectors and technical personnel (through their EPA compliance counsel) to resolve these concerns as efficiently as possible—and ideally during the inspection process so that no follow-up interactions with the EPA are necessary.

5. Focus on Achieving a Final Resolution that Avoids Further Inquiry

Overall, the primary focus of a company’s EPA inspection defense should be on achieving a final resolution that avoids further inquiry. Not only can post-inspection civil investigations present substantial risks, but unresolved compliance concerns can leave companies (and their owners and executives) exposed to the possibility of criminal prosecution in some cases as well.

What to Do After an EPA Inspection 

Finally, here are some key considerations for what to do after an EPA inspection:

1. Complete Any Necessary Follow-Up as Efficiently as Possible 

If any follow-up corrective or remedial action is necessary following an EPA inspection, the company should prioritize completing this follow-up as efficiently as possible. Not only will this help to mitigate any penalty exposure, but it will also help mitigate the risk of raising additional concerns with the EPA.

2. Implement Any Lessons Learned 

If the EPA’s inspection resulted in any lessons learned, the company should also prioritize implementing these lessons learned in order to prevent the recurrence of any issues uncovered during the inspection process. This is true whether implementation involves making minor tweaks to the company’s documentation procedures or completing a substantial overhaul of the company’s environmental compliance program.

3. Use Systematic EPA Compliance Audits to Evaluate and Maintain Compliance 

Systematic auditing is one of the most efficient and most effective ways that companies can evaluate and maintain EPA compliance. For companies that are not using the EPA’s Audit Protocols already, working with experienced outside counsel to implement these protocols will be a key next step as well.

4. Challenge Any Unwarranted Conclusions as Warranted 

If the company’s EPA inspection resulted in unwarranted determinations of non-compliance, seeking to reverse the agency’s conclusions may involve working with its lawyers post-inspection. Depending on the circumstances, it may also involve going to court. Whatever it takes, ensuring that the company does not face unjustified penalties will be essential for both short-term and long-term environmental compliance risk management.

5. Prepare for Further Enforcement Action as Necessary 

If an EPA inspection results in substantial findings of non-compliance, it may be necessary to prepare for further enforcement action. Depending on the circumstances, this could involve facing a civil investigation, a criminal investigation conducted jointly by the EPA and the U.S. Department of Justice (DOJ), or litigation in federal court. Here, too, an informed and strategic defense is essential, and it will be critical to continue working with experienced EPA compliance counsel throughout this process.

Oberheiden P.C. © 2024
For more news on EPA Site Inspections, visit the NLR Environmental, Energy, & Resources section.

A Look at the Evolving Scope of Transatlantic AI Regulations

There have been significant changes to the regulations surrounding artificial intelligence (AI) on a global scale. New measures from governments worldwide are coming online, including the United States (U.S.) government’s executive order on AI, California’s upcoming regulations, the European Union’s AI Act, and emerging developments in the United Kingdom that contribute to this evolving environment.

The European Union (EU) AI Act and the U.S. Executive Order on AI aim to develop and utilize AI safely, securely, and with respect for fundamental rights, yet their approaches are markedly different. The EU AI Act establishes a binding legal framework across EU member states, directly applies to businesses involved in the AI value chain, classifies AI systems by risk, and imposes significant fines for violations. In contrast, the U.S. Executive Order is more of a guideline as federal agencies develop AI standards and policies. It prioritizes AI safety and trustworthiness but lacks specific penalties, instead relying on voluntary compliance and agency collaboration.

The EU approach includes detailed oversight and enforcement, while the U.S. method encourages the adoption of new standards and international cooperation that aligns with global standards but is less prescriptive. Despite their shared objectives, differences in regulatory approach, scope, enforcement, and penalties could lead to contradictions in AI governance standards between the two regions.

There has also been some collaboration on an international scale. Recently, there has been an effort between antitrust officials at the U.S. Department of Justice (DOJ), U.S. Federal Trade Commission (FTC), the European Commission, and the UK’s Competition and Markets Authority to monitor AI and its risks to competition. The agencies have issued a joint statement, with all four antitrust enforcers pledging to “to remain vigilant for potential competition issues” and to use the powers of their agencies to provide safeguards against the utilization of AI to undermine competition or lead to unfair or deceptive practices.

The regulatory landscape for AI across the globe is evolving in real time as the technology develops at a record pace. As regulations strive to keep up with the technology, there are real challenges and risks that exist for companies involved in the development or utilization of AI. Therefore, it is critical that business leaders understand regulatory changes on an international scale, adapt, and stay compliant to avoid what could be significant penalties and reputational damage.

The U.S. Federal Executive Order on AI

In October 2023, the Biden Administration issued an executive order to foster responsible AI innovation. This order outlines several key initiatives, including promoting ethical, trustworthy, and lawful AI technologies. It also calls for collaboration between federal agencies, private companies, academia, and international partners to advance AI capabilities and realize its myriad benefits. The order emphasizes the need for robust frameworks to address potential AI risks such as bias, privacy concerns, and security vulnerabilities. In addition, the order directs that various sweeping actions be taken, including the establishment of new standards for AI safety and security, the passing of bipartisan data privacy legislation to protect Americans’ privacy from the risks posed by AI, the promotion of the safe, responsible, and rights-affirming development and deployment of AI abroad to solve global challenges, and the implementation of actions to ensure responsible government deployment of AI and modernization of the federal AI infrastructure through the rapid hiring of AI professionals.

At the state level, Colorado and California are leading the way. Colorado enacted the first comprehensive regulation of AI at the state level with The Colorado Artificial Intelligence Act (Senate Bill (SB) 24-205), signed into law by Governor Jared Polis on May 17, 2024. As our team previously outlined, The Colorado AI Act is comprehensive, establishing requirements for developers and deployers of “high-risk artificial intelligence systems,” to adhere to a host of obligations, including disclosures, risk management practices, and consumer protections. The Colorado law goes into effect on February 1, 2026, giving companies over a year to thoroughly adapt.

In California, a host of proposed AI regulations focusing on transparency, accountability, and consumer protection would require the disclosure of information such as AI systems’ functions, data sources, and decision-making processes. For example, AB2013 was introduced on January 31, 2024, and would require that developers of an AI system or service made available to Californians to post on the developer’s website documentation of the datasets used to train the AI system or service.

SB970 is another bill that was introduced in January 2024 and would require any person or entity that sells or provides access to any AI technology that is designed to create synthetic images, video, or voice to give a consumer warning that misuse of the technology may result in civil or criminal liability for the user.

Finally, on July 2, 2024 the California State Assembly Judiciary Committee passed SB-1047 (Safe and Secure Innovation for Frontier Artificial Intelligence Models Act), which regulates AI models based on complexity.

The European Union’s AI Act

The EU is leading the way in AI regulation through its AI Act, which establishes a framework and represents Europe’s first comprehensive attempt to regulate AI. The AI Act was adopted to promote the uptake of human-centric and trustworthy AI while ensuring high level protections of health, safety, and fundamental rights against the harmful effects of AI systems in the EU and supporting innovation.

The AI Act sets forth harmonized rules for the release and use of AI systems in the EU; prohibitions of certain AI practices; specific requirements for high-risk AI systems and obligations for operators of such systems; harmonized transparency rules for certain AI systems; harmonized rules for the release of general-purpose AI models; rules on market monitoring, market surveillance, governance, and enforcement; and measures to support innovation, with a particular focus on SMEs, including startups.

The AI Act classifies AI systems into four risk levels: unacceptable, high, limited, and minimal. Applications that pose an unacceptable risk, such as government social scoring systems, are outright banned. High-risk applications, including CV-scanning tools, face stringent regulations to ensure safety and accountability. Limited risk applications lack full transparency as to AI usage, and the AI Act imposes transparency obligations. For example, humans should be informed when they are using AI systems (such as chatbots) that they are interacting with a machine and not a human so as to enable the user to make an informed decision whether or not to continue. The AI Act allows the free use of minimal-risk AI, including applications such as AI-enabled video games or spam filters. The vast majority of AI systems currently used in the EU fall into this category.

The adoption of the AI Act has not come without criticism from major European companies. In an open letter signed by 150 executives, they raised concerns over the heavy regulation of generative AI and foundation models. The fear is that the increased compliance costs and hindered productivity would drive companies away from the EU. Despite these concerns, the AI Act is here to stay, and it would be wise for companies to prepare for compliance by assessing their systems.

Recommendations for Global Businesses

As governments and regulatory bodies worldwide implement diverse AI regulations, companies have the power to adopt strategies that both ensure compliance and mitigate risks proactively. Global businesses should consider the following recommendations:

  1. Risk Assessments: Conducting thorough risk assessments of AI systems is important for companies to align with the EU’s classification scheme and the U.S.’s focus on safety and security. There must also be an assessment of the safety and security of your AI systems, particularly those categorized as high-risk under the EU’s AI Act. This proactive approach will not only help you meet regulatory requirements but also protect your business from potential sanctions as the legal landscape evolves.
  2. Compliance Strategy: Develop a compliance strategy that specifically addresses the most stringent aspects of the EU and U.S. regulations.
  3. Legal Monitoring: Stay on top of evolving best practices and guidelines. Monitor regulatory developments in regions in which your company operates to adapt to new requirements and avoid penalties and engage with policymakers and industry groups to stay ahead of compliance requirements. Participation in public consultations and industry forums can provide valuable insights and influence regulatory outcomes.
  4. Transparency and Accountability: To meet ethical and regulatory expectations, transparency and accountability should be prioritized in AI development. This means ensuring AI systems are transparent, with clear documentation of data sources, decision-making processes, and system functionalities. There should also be accountability measures in place, such as regular audits and impact assessments.
  5. Data Governance: Implement robust data governance measures to meet the EU’s requirements and align with the U.S.’s emphasis on trustworthy AI. Establish governance structures that ensure compliance with federal, state, and international AI regulations, including appointing compliance officers and developing internal policies.
  6. Invest in Ethical AI Practices: Develop and deploy AI systems that adhere to ethical guidelines, focusing on fairness, privacy, and user rights. Ethical AI practices ensure compliance, build public trust, and enhance brand reputation.
© 2024 Foley & Lardner LLP
For more news on AI Regulations, visit the NLR Consumer Protection section.

Court Affirmed Holding That Plaintiffs Did Not Have Standing To Sue Regarding A Charitable Trust

In Dao v. Trinh, a group of five individuals who contributed money for membership in a religious community sued the person who they alleged misapplied their money for the benefit of a different religious community. No. 14-23-00131-CV, 2024 Tex. App. LEXIS 3208 (Tex. App.—Houston [14th Dist.] May 9, 2024, no pet. history). The plaintiffs brought fraud claims for alleged misrepresentations and breach of contract. The defendant filed a plea to the jurisdiction, alleging that the plaintiffs did not have standing to sue. The trial court entered an order dismissed the plaintiff’s claims with prejudice and expressly found that the plaintiffs lacked standing to bring their fraud and breach of contract claims.

The court of appeals affirmed. The court first discussing standing to sue over a charitable trust:

No party disputes that the Cao Dai organization in question, for which Trinh is the founder and director, is a “charitable trust”. This is particularly significant because the attorney general “is the representative of the public and is the proper party to maintain” a suit “vindicating the public’s rights in connection with that charity.” A private individual has standing to maintain a suit against a public charity only if the person seeks vindication of some peculiar or individual rights, distinct from those of the public at large. Moreover, a private individual must similarly establish standing in a case such as this, brought against the trustee of a public charity in connection with their office or service.

Id. The court concluded that whether framed as a fraud or breach of contract claim, the plaintiffs did not have standing to sue for the return of their donations:

Based on the holding in Eshelman, we conclude the Temple Donor Parties’ allegations and proof for their fraud claims pertaining to their donations to a charitable fails to establish standing to bring their claims (whether under a fraud theory or conditional gift theory); that is, the facts alleged and undisputed do not vindicate of some peculiar or individual rights, distinct from any other donor or from the public at large.

Id.

© 2024 Winstead PC.
For more news on Claims Against Charitable Trusts, visit the NLR Estates & Trusts section.

2025: SLATs on the Brink of a Rapid Rise in Popularity?

The 2010 Tax Relief Act temporarily increased the federal estate and gift tax exemption to $5 million per individual, a significant rise from prior years. As the 2012 fiscal cliff approached, concerns grew that these higher exemptions might be reduced, prompting a surge in estate planning activities. During this period, Spousal Lifetime Access Trusts (SLATs) gained popularity as estate planners promoted them as a strategic tool to lock in the increased exemption, allowing one spouse to make substantial gifts to a trust benefiting the other spouse while still retaining some access to the assets.

Figure 1: Google Search Volume Jul 2011 – Aug 2024 for GRATs (yellow) and SLATs (red)

The outlook – Estate tax exemption down to $3.5 Million in 2025?

Since the introduction of a higher gift and estate tax lifetime exemption after 2017, the focus of tax planning for many clients has shifted from reducing estate taxes to minimizing income taxes. In 2024, each taxpayer can pass up to $13.61 million to beneficiaries without incurring gift and estate taxes or $27.22 million for married couples. With the top estate tax rate at 40% for amounts exceeding these limits, many believe that the high exemption eliminates the need for complex end-of-life tax planning. However, these elevated exemption amounts are set to revert to pre-2017 levels in 2026, potentially lowering the exemption to around $5 million per individual.

Adding to this urgency, proposals like Elizabeth Warren’s tax plan (1) could further reduce the estate tax exemption to $3.5 million per individual, with increased tax rates on larger estates. Such changes would significantly broaden the scope of estates subject to taxation, making proactive planning essential. In this context, many savvy taxpayers are turning to strategies like Spousal Lifetime Access Trusts (SLATs) to maximize the current exemption while it remains high, allowing them to lock in tax advantages before the expected changes take effect.

What to do?

Use the higher exemption amounts before they go away by establishing trusts that remove assets from the taxable estate. Spousal Lifetime Access Trusts, or “SLATs,” have emerged as one of the most popular and effective estate planning tools for this purpose.

Type of Trust Purpose Key Features Tax Implications
Spousal Lifetime Access Trust (SLAT) Remove assets from taxable estate while providing spouse access One spouse creates trust for the benefit of the other; assets grow outside estate; irrevocable Assets removed from grantor’s estate; no estate tax on appreciation; spouse can access funds
Grantor Retained Annuity Trust (GRAT) Transfer asset appreciation to heirs with minimal gift tax Grantor retains an annuity for a set period; remaining assets pass to beneficiaries Minimal gift tax on remainder interest; potential to transfer appreciation tax-free
Irrevocable Life Insurance Trust (ILIT) Exclude life insurance proceeds from taxable estate Owns and controls life insurance policy; proceeds not included in estate Life insurance proceeds are estate tax-free; may have gift tax on premiums paid
Charitable Remainder Trust (CRT) Provide income stream to grantor and charity, reduce estate size Income stream to grantor or beneficiaries; remainder to charity; irrevocable Partial estate tax deduction; reduces taxable estate; income stream taxed
Qualified Personal Residence Trust (QPRT) Transfer primary or vacation home out of estate Grantor retains right to live in home for set period; home passes to heirs afterward Reduces estate tax by freezing value of home; gift tax on remainder interest

How do SLATs work?

SLATs allow one spouse, known as the donor spouse, to transfer assets into an irrevocable trust for the benefit of the other spouse, the beneficiary spouse. This transfer uses the donor spouse’s lifetime exclusion amount, effectively removing the assets from their taxable estate, including any future appreciation. The beneficiary spouse can access the trust’s assets as needed, providing flexibility and financial security. Meanwhile, the donor spouse maintains indirect access to the assets through their marriage. The donor spouse also controls how the trust assets will be managed and distributed when the SLAT is created. Additionally, SLATs offer strong asset protection, as the trust structure can help defend against potential creditor claims.

Some Caveats

It’s important to also consider and discuss with clients the potential drawbacks of SLATs. Some of the key disadvantages include:

Risk of Divorce or Death: If the donor spouse and beneficiary spouse divorce or if the beneficiary spouse predeceases the donor spouse, the donor risks losing access to the assets in the SLAT. To mitigate this risk, a “floating spouse” provision can be included in the trust, identifying the beneficiary as the “person to whom the settlor is currently married” rather than naming a specific individual. Additionally, the trust can be drafted to allow the trustee to make loans to the donor spouse for further protection.

Unwanted Tax Consequences: SLATs can lead to unfavorable estate, gift, and income tax outcomes. If the donor spouse retains certain powers over the trust, such as the unrestricted ability to replace the trustee, the SLAT’s assets might be included in the donor spouse’s estate, undermining the trust’s tax avoidance objectives. Contributions to a SLAT are also considered completed gifts, so if the contribution exceeds the annual gift tax exclusion ($18,000 in 2024), it will reduce the donor spouse’s lifetime exclusion. Additionally, because SLAT assets typically do not receive a “step up” in cost basis at either spouse’s death, this can increase capital gains taxes for beneficiaries when the assets are eventually sold.

Application of the Reciprocal Trust Doctrine: Couples must be cautious about creating reciprocal SLATs, as this could lead to the trusts being “uncrossed” and included in each spouse’s estate, defeating the primary purpose of the SLAT. Proper planning and drafting are essential to avoid this pitfall.

Indirect Gift Doctrine: According to Internal Revenue Code (IRC) § 2036, if an individual transfers assets but retains the right to income, possession, or enjoyment of the assets or retains control over who will benefit from them, those assets will be included in their gross estate for estate tax purposes.

This situation can easily occur when creating a Spousal Lifetime Access Trust (SLAT). For example, both spouses may intend to create SLATs with each other as beneficiaries while introducing various differences to avoid the “reciprocal trust” doctrine established in the Grace case, 395 U.S. 316 (1969) (see above). However, if one spouse lacks significant assets, the wealthier spouse might give assets to the less affluent spouse, who then uses those assets to fund a trust that names the wealthier spouse as a beneficiary. If the indirect gift principle is applied, the wealthier spouse could be considered the trust’s grantor for estate tax purposes, thus including the trust’s assets in their gross estate under § 2036. Additionally, if the wealthy spouse is the trustee or holds certain tax-sensitive powers, estate inclusion may also result under § 2036(a)(2) or § 2038. This scenario is common among couples with significant differences in wealth. For this reason, many practitioners avoid reciprocal SLATs.

A practical example

James owns an LLC that he has held for about three or four years. He wants the LLC’s investments to support his wife, Emma, during her lifetime and then pass on to benefit their children and later their grandchildren without being subject to federal estate tax.

To achieve this, James forms an irrevocable SLAT for Emma and the children, naming Emma and their friend, Grace, as co-trustees. James retains the right to replace the trustee of the trust at any time and for any reason, provided the replacement is someone who is not related to him or employed by him.

The trust stipulates that Emma can make distributions to herself based on what is reasonably needed for her health, education, maintenance, and support (HEMS standard). Grace, as an independent trustee who is not a beneficiary of the trust, has the power to distribute any or all of the trust assets to Emma at any time and for any reason, according to her sole and absolute discretion, with no obligation to make such distributions.

The trust also grants Emma the right to redirect how the trust assets will be distributed upon her death, provided they are used solely for their descendants. This is known as a “limited power of appointment.”

In this scenario, James retains the right to replace trust assets with assets of equal value, making the trust “disregarded” during James’s lifetime for federal income tax purposes. Additionally, Emma’s role as both a trustee and beneficiary of the trust also causes the trust to be “disregarded” for federal income tax purposes during James’s lifetime. In other words, James and not the trust pays income taxes (2).

Conclusion

As we look toward 2025, Spousal Lifetime Access Trusts (SLATs) are positioned for a significant surge in popularity. Initially gaining traction during the uncertainty of the 2012 fiscal cliff, SLATs have continued to evolve as a cornerstone of strategic estate planning, especially as clients face the prospect of a reduced federal estate tax exemption. With the exemption potentially dropping to $3.5 million per individual if the Warren tax proposals are enacted, SLATs offer a timely and powerful tool to lock in current tax advantages, allowing couples to transfer substantial wealth while maintaining flexibility and financial security.

However, SLATs are not without their complexities and potential pitfalls. The risks of divorce, death, and unfavorable tax consequences highlight the need for careful drafting and planning. By integrating provisions such as a “floating spouse” clause and adhering to the Health, Education, Maintenance, and Support (HEMS) standard, practitioners can mitigate these risks and enhance the trust’s effectiveness.

Ultimately, as the landscape of estate planning continues to shift, the steady rise of SLATs will likely accelerate, making them an increasingly essential part of the conversation between clients and their advisors. Whether as a means to navigate the complexities of estate tax law or to ensure the financial well-being of future generations, SLATs stand ready to play a pivotal role in the years ahead.

References:

  1. American Housing and Economic Mobility Act of 2024 https://www.warren.senate.gov/imo/media/doc/final_text_-_ahem_2024.pdf
  2. Adapted from an example in Alan S. Gassman, Christopher J. Denicolo & Brandon Ketron, SLAT-OPEDIA: Considering All Options and a Client-Friendly Letter, Tax Mgmt. Est., Gifts & Tr. J. (2021). PermaLink https://perma.cc/5636-T5W5
© 2024 wealthcarelawyer.com. All rights reserved
For more news on Spousal Lifetime Access Trusts, visit the NLR Estates Trusts section.

US Department of State Announces Annual Limit Reached in EB-5 Unreserved Category

The U.S. State Department and U.S. Citizenship and Immigration Services announced that they have issued all legally available visas in the unreserved EB-5 Immigrant Investor Program categories for Fiscal Year 2024. Embassies and consulates have been directed to not issue immigrant visas in these categories until the new fiscal year (FY 2025) starts on Oct. 1, 2024.

As discussed in our recent blog post on EB-5 filing strategies, a total of approximately 140,000 immigrant visas are available every fiscal year for employment-based immigrant visas, including the EB-1, EB-2, EB-3, EB-4, and EB-5 categories. Of the 140,000 immigrant visas available annually, the government allocates approximately 10,000 to the EB-5 investor visa program. The visas are also subject to per-country visa quotas. The Immigration and Nationality Act sets the annual limit for EB-5 visas at 7.1% of the worldwide employment limit, of which 68% is available for unreserved visa categories (C5, T5, I5, R5, RU, NU). Additionally, the EB-5 Reform and Integrity Act of 2022 makes unused EB-5 reserved visas from FY 2022 available in the EB-5 unreserved categories for FY 2024.

©2024 Greenberg Traurig, LLP. All rights reserved.
For more news on B-5 Immigrant Investor Program Visas, visit the NLR Immigration section.

AI-Generated Content and Trademarks

The rapid evolution of artificial intelligence has undeniably transformed the digital landscape, with AI-generated content becoming increasingly common. This shift has profound implications for brand owners introducing both challenges and opportunities.

One of the most pressing concerns is trademark infringement. In a recent example, the Walt Disney Company, a company fiercely protective of its intellectual property, raised concerns about AI-generated content potentially infringing on its trademarks.  Social media users were having fun using Microsoft’s Bing AI imaging tool, powered by DALL-E 3 technology, to create images of pets in a “Pixar” style.  However, Disney’s concern wasn’t the artwork itself, but the possibility of the AI inadvertently generating the iconic Disney-Pixar logo within the images, constituting a trademark infringement. This incident highlights the potential for AI-generated content to unintentionally infringe upon established trademarks, requiring brand owners to stay vigilant in protecting their intellectual property in the digital age.

Dilution of trademarks is another critical issue. A recent lawsuit filed by Getty Images against Stability AI sheds light on this concern. Getty Images, a leading provider of stock photos, accused Stability AI of using millions of its copyrighted images to train its AI image generation software. This alleged use, according to Getty Images, involved Stability AI’s incorporation of Getty Images’ marks into low-quality, unappealing, or offensive images which dilutes those marks in further violation of federal and state trademark laws. The lawsuit highlights the potential for AI, through the sheer volume of content it generates, to blur the lines between inspiration and infringement, weakening the association between a trademark and its source.

In addition, the ownership of copyrights in AI-generated marketing can cause problems. While AI tools can create impressive content, questions about who owns the intellectual property rights persist.  Recent disputes over AI-generated artwork and music have highlighted the challenges of determining ownership and copyright in this new digital frontier.

However, AI also presents opportunities for trademark owners. For example, AI can be employed to monitor online platforms for trademark infringements, providing an early warning system. Luxury brands have used AI to authenticate products and combat counterfeiting. For instance, Entrupy has developed a mobile device-based authentication system that uses AI and microscopy to analyze materials and detect subtle irregularities indicative of counterfeit products. Brands can integrate Entrupy’s technology into their retail stores or customer-facing apps.

Additionally, AI can be a powerful tool for brand building. By analyzing consumer data and preferences, AI can help create highly targeted marketing campaigns. For example, cosmetic brands have successfully leveraged AI to personalize product recommendations, enhancing customer engagement and loyalty.

The intersection of AI and trademarks is a dynamic and evolving landscape. As technology continues to advance, so too will the challenges and opportunities for trademark owners. Proactive measures, such as robust trademark portfolios, AI-powered monitoring tools, and clear internal guidelines, are essential for safeguarding brand integrity in this new era.

Copyright ©2024 Nelson Mullins Riley & Scarborough LLP
For more news on AI and Trademarks, visit the NLR Intellectual Property section.

Lyft Owes No Duty To Its Drivers To Do Background Checks On Riders

Al Shikha v. Lyft, Inc., 102 Cal. App. 5th 14 (2024)

While working as a Lyft driver, Abdu Lkader Al Shikra was stabbed by a passenger in a “sudden and unprovoked attack.” Al Shikra sued Lyft for negligence based on its failure to conduct criminal background checks on all passengers. The trial court granted Lyft’s motion for judgment on the pleadings, and the Court of Appeal affirmed dismissal of the complaint after concluding that conducting criminal background checks on all passengers would be “highly burdensome” to Lyft and that the type of harm Al Shikha suffered was not “highly foreseeable.”

© 2024 Proskauer Rose LLP.
For more from California Courts, visit the NLR Litigation Trial Practice section

The Administration Creates New Pathways for DACA Recipients to Obtain Legal Status

Among the multiple executive actions the White House announced on June 18, 2024, was one stating it was taking steps to facilitate the process for certain Deferred Action for Childhood Arrivals (DACA) recipients to obtain work visas/status. DACA was created in 2012 by President Barack Obama as a means for immigrant youth who met certain eligibility requirements to qualify for work authorizations and obtain “deferred action.”

While DACA protection has enabled hundreds of thousands of individuals to legally work and live in the U.S., the program has faced considerable uncertainty since 2017, when the Trump administration initially sought to terminate the program, but was prevented from doing so in the federal courts.

The program continues to face legal challenges, and additional litigation before the U.S. Supreme Court is likely. Fundamentally, DACA is not a legal status – the reliance on “deferred action” simply reflects the U.S. Department of Homeland Security’s (DHS) decision not to bring immigration removal proceedings against a specific individual. While many DACA recipients and their employers have since sought to transition to a work visa or other legal status that Congress specifically established in the Immigration and Nationality Act (INA), the process for doing so is uncertain, expensive and cumbersome.

Since DACA recipients either entered without authorization or were out of status when they received DACA protection, they are typically ineligible for a transition to a lawful status within the U.S.

Instead, they are required under immigration law to “consular process” outside the U.S. and obtain a work visa at a U.S. consulate. The individual’s departure from the U.S. could trigger removal bars (similar to those described above), requiring the individual to obtain a temporary waiver of inadmissibility from the government. These waivers, known as “d3 waivers” based on the section of the INA to which they relate, can take months to obtain and the outcome of such a waiver is not certain. These cumulative issues have chilled the interest of many employers and DACA recipients in pursuing these waivers.

On July 15, 2024, the U.S. Department of State made changes to the Foreign Affairs Manual (FAM), which is controlling guidance for consular officers at U.S. Consulates on factors to consider when adjudicating waiver requests. The three primary changes that the DOS made to 9 FAM 305.4-3 are:

  1. Expanding the factors that would have a positive effect on U.S. public interests in granting a waiver to include circumstances “where the applicant has graduated with a degree from an institution of higher education in the United States, or has earned credentials to engage in skilled labor in the United States, and is seeking to travel to the United States to commence or continue employment with a U.S. employer in a field related to the education that the applicant attained in the United States….” These changes noted in bold are clearly designed to benefit many DACA recipients.
  2. The second change creates a mechanism for a waiver applicant whose request is denied by a consular officer to request State Department review in circumstances involving “significant public interest,” which in turn cross-references the factors above that are of particular benefit to DACA recipients.
  3. The FAM was also updated to reflect the ability of DACA recipients who have graduated from an educational program in the United States or are seeking to reenter the U.S. with a visa as beneficiaries of an offer of employment to request an expedite of the waiver request. This change is particularly critical as one of the greatest challenges that DACA recipients face when seeking a waiver is the uncertain adjudication period, which often stretches for months.

Collectively, these updates are significant and will benefit several DACA recipients who are beneficiaries of employer sponsorship. These pathways also create a mechanism for U.S. employers to transition DACA recipients from DACA, with its increasing uncertainty, to a more stable work visa. DACA recipients should, of course, plan prudently if considering a departure from the U.S. to apply for such a waiver and should also apply for advance parole before departing the U.S. so as to provide a mechanism for reentering the U.S. if the waiver request is denied.

© 2024 BARNES & THORNBURG LLP
by: Tejas Shah, M. Mercedes Badia-Tavas of Barnes & Thornburg LLP
For more news on the DACA Executive Order, visit the NLR Immigration section.

US District Court Sets Aside the FTC’s Noncompete Ban on a Nationwide Basis

On August 20, the US District Court for the Northern District of Texas held that the Federal Trade Commission’s (FTC) final rule banning noncompetes is unlawful and “set aside” the rule. “The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

The district court’s decision has a nationwide effect. The FTC is very likely to appeal to the Fifth Circuit. Meanwhile, employers need not concern themselves for now with the rule’s notice obligations, and the FTC’s purported nationwide bar on noncompetes is ineffective. Employers do, however, need to remain mindful of the broader trend of increasing hostility to employee noncompetes.

The Court’s Decision

On April 23, the FTC voted 3-2 to publish a final rule with sweeping effects, purporting to bar prospectively and invalidate retroactively most employee noncompete agreements. The court’s decision addressed cross-motions for summary judgment on the propriety of the FTC’s rule. The court denied the FTC’s motion and granted the plaintiffs’ motion for two reasons.

First, the court held that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g) of the FTC Act. In reaching its holding, the court considered the statute’s plain language, Section 6(g)’s structure and location within the FTC Act, the absence of any penalty provisions for violations of rules promulgated under Section 6(g), and the history of the FTC Act and subsequent amendments. Because the FTC lacked substantive rulemaking authority with respect to unfair methods of competition, and hence authority to issue the final noncompete rule, the court did not consider additional arguments regarding the scope of the FTC’s statutory rulemaking authority. Notably, the court did not consider whether the final rule could overcome the major questions doctrine.

Second, the court held that the FTC’s final noncompete rule was arbitrary and capricious under the Administrative Procedure Act (APA) because it was “unreasonably overbroad without a reasonable explanation” and failed to establish “‘a rational connection between the facts found and the choice made.’” The court heavily discounted studies that the FTC had relied upon that purported to measure the impact of statewide noncompete bans because no state had ever enacted a ban as broad as the FTC’s ban: “[t]he FTC’s evidence compares different states’ approaches to enforcing non-competes based on specific factual situations — completely inapposite to the Rule’s imposition of a categorical ban.” “In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.” The court further held that the FTC failed to sufficiently address alternatives to issuing the rule.

In terms of a remedy, the court “set aside” the FTC’s final noncompete rule. The “set aside” language is drawn verbatim from the APA. The court noted that the FTC’s argument that any relief should be limited to the named plaintiffs in the case was unsupported by the APA. Instead, the court noted that its decision has a nationwide effect, is not limited to the parties in the case, and affects all persons in all judicial districts equally.

Further Litigation

In addition to a likely FTC appeal to the Fifth Circuit, two other cases are pending that likewise challenge the FTC’s final noncompete rule. First, in ATS Tree Services v. FTC, pending in the Eastern District of Pennsylvania, the district court previously denied the plaintiff’s motion for a preliminary injunction. Second, in Properties of the Villages, Inc. v. FTC, pending in the Middle District of Florida, the court enjoined the FTC from enforcing the rule against the named plaintiffs. A final judgment in one of these cases that differs from the result in the Northern District of Texas could eventually reach the courts of appeals and potentially lead to a circuit split to be resolved by the US Supreme Court.

Takeaways for Employers

For now, the FTC’s noncompete rule has been set aside on a nationwide basis, and employers need not comply with the rule’s notice obligations. Noncompetes remain enforceable to the same extent they were before the FTC promulgated its final rule. Depending on how further litigation evolves, the rule could be revived, a temporary split in authority could arise leading to confusion where the rule is enforceable in certain jurisdictions but not in others, or the rule will remain set aside.

An important part of the court’s decision is its rejection of the FTC’s factual findings, which were made in support of the rule, as poorly reasoned and poorly supported. As we discussed in our prior client alerts, we anticipate that employees may cite the FTC’s findings to support challenges to enforceability under state law. The court’s analysis of the FTC’s factual findings may substantially undermine the persuasive authority of the FTC’s findings.

Employers should anticipate that noncompete enforcements in the coming years will remain uncertain as courts, legislatures, and government agencies continue to erode the legal and policy justifications for employee noncompetes. This counsels in favor of a “belt and suspenders” approach for employers to protect their legitimate business interests rather than relying solely on noncompetes.

© 2024 ArentFox Schiff LLP
For more on the FTC Noncompete Ban, visit the NLR Labor Employment section

Deep in the Heart of Texas: Court Blocks FTC Non-Compete Rule

On August 20, 2024, the United States District Court for the Northern District of Texas invalidated the FTC’s rule banning most non-compete agreements.  Ryan LLC et al v. Federal Trade Commission, WL 3297524 (08/20/2024). In its highly anticipated opinion, the Court determined the FTC exceeded its authority in promulgating the rule and that the rule is arbitrary and capricious.  This decision was not limited to the parties before the Court and blocks the rule from becoming effective nationwide on September 4, 2024.  As a result, existing non-compete agreements may still be valid and enforceable when permitted under applicable law.

Ryan, LLC (“Ryan”) filed its lawsuit on April 23, 2024, arguing the FTC did not have rulemaking authority under the Federal Trade Commission Act, that the rule is the product of an unconstitutional exercise of power, and that the FTC’s acts and findings were arbitrary and capricious.  Several plaintiffs, including the U.S. Chamber of Commerce, intervened in the lawsuit to challenge the rule.

In July, the Court enjoined the FTC from implementing or enforcing the rule.  That ruling, however, was limited in scope and only applied to Ryan and the intervening plaintiffs.  Shortly thereafter, all parties filed motions for summary judgment.  Plaintiffs asked the Court to invalidate the FTC’s rule, and the FTC sought dismissal under the theory it has express rulemaking authority under the FTC Act.

The Court first examined the FTC’s statutory rulemaking authority and determined the rulemaking provisions under the FTC Act do not expressly grant the FTC authority to promulgate substantive rules.  The Court reasoned that although the Act provides some rulemaking authority, that authority is limited to “housekeeping” types of rules.  The Court concluded “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition…”  As a result, the Court held the FTC exceeded its statutory authority in promulgating the rule.

Next, the Court considered whether the rule and the promulgation procedure was arbitrary and capricious.  The Court was unconvinced by the studies and other evidence relied on by the FTC in promulgating the rule and found that the FTC failed to demonstrate a rational basis for imposing the rule.  The Court also noted that the FTC was required to consider less disruptive alternatives to its near complete ban on non-compete agreements.  Although the FTC argued it had “compelling justifications” to ignore potential exceptions and alternatives, the Court concluded the rule was unreasonable and the FTC failed to adequately explain alternatives to the proposed rule.  Ultimately, the Court opined the rule was based on flawed evidence, that it failed to consider the positive benefits of non-compete clauses and improperly disregarded substantial evidence supporting non-compete clauses.

As a result of this ruling, the FTC’s rule will not become effective on September 4, 2024, short of any additional orders or rulings from a higher court reversing or staying the decision.  For the time being, the existing laws governing non-compete agreements will remain in place.  In Michigan, employers may enforce non-compete agreements that are reasonable in duration, geographical area and type of employment or line of business. In Illinois, they are regulated by the Illinois Freedom to Work Act, which imposes a stricter regulatory scheme. This should come as a relief for employers who can generally avoid—at least for now—analyzing complex issues regarding the impact that the FTC’s rule would have had on executive compensation arrangements tied to compliance with non-compete agreements, especially in the tax-exempt organization context.

© 2024 Miller, Canfield, Paddock and Stone PLC

by: D. Kyle Bierlein, Brian T. Gallagher, Barry P. Kaltenbach, Brian Schwartz of Miller Canfield

For more news on the Federal Court Ruling Against the FTC’s Non-compete Rule, visit the NLR Labor & Employment section.