The National Law Forum

Avoiding Commercial Lease Disputes – Clearly Reflecting the Intent of the Parties is Key!

A commercial lease symbolizes a consensual relationship between parties that can be enduring and rewarding, or short-sighted and emotionally and financially taxing.

Entering into a clearly drafted lease agreement at the outset of the relationship helps to set expectations, which minimizes the possibility of disputes over how the lease should be interpreted.

However, not all commercial leases are clearly drafted, and disputes often arise between the parties over such issues as:

How the property can be used,
Who has responsibility for maintaining the property,
Effect of short term non-payments of rent caused by factors beyond the control of the tenant or just sheer forgetfulness, and
Who gets what when the lease terminates.

Disputes can also arise over the interpretation of provisions in commercial leases which deal with insurance coverage and liability of the parties. Commercial leases typically include provisions which require one or both of the parties to have and maintain property and liability insurance policies with specific amounts of coverage. These clauses also may include provisions which address the responsibility of the parties for damages or personal injuries.

Insurance and liability clauses are very important, and clearly drafting such clauses when the lease is created can minimize disputes between the parties regarding their obligations and liabilities under the terms of the lease. Understanding how North Carolina Courts interpret such clauses may help the parties draft clear and unambiguous provisions which will set appropriate expectations and minimize the risk of future disputes between the parties.

The North Carolina Supreme Court recently published an opinion which addresses this issue and provides guidance on how the North Carolina courts should interpret insurance and liability provisions in commercial leases. On December 7, 2018, the North Carolina Supreme Court reversed a decision of a divided panel of the North Carolina Court of Appeals in the case of Morrell v. Hardin Creek, Inc. The issue decided by the Court was whether the insurance and liability provisions of a commercial lease operated as a complete bar to the tenant’s claims for damage against the landlord and other defendants. In a split decision, the Court determined that the clear and unambiguous language of the subject lease indicated that the parties intended to discharge each other from all claims and liabilities resulting from hazards covered by insurance.

In Morrell, the tenant was in the business of manufacturing and distributing specialty pasta. The tenant entered into a commercial lease for a building located in Boone, North Carolina. During the term of the lease, an inspection of the premises found that modifications needed to be made to the building in order for the building to comply with state regulations regarding the production of food.

The lease contained a provision which allowed the tenant to alter or remodel the premises. That provision also included language which stated that the parties agreed to discharge each other from all claims and liabilities arising from or caused by any hazard covered by insurance regardless of the cause of the damage or loss. The landlord agreed to make the modifications in exchange for an extension in the term of the lease. The project was completed but later discovered to be in violation of certain building code provisions related to fire sprinkler systems.

The violations were discovered when the sprinkler pipes burst and flooded the premises. The flooding destroyed the tenant’s inventory and specialty equipment. The tenant sued the landlord for negligence and other claims relating to the damages. The landlord moved for summary judgment and asserted that the damages discharge clause in the provision of the lease which allowed the remodeling barred all of the tenant’s claims against the landlord.

The trial court agreed with the landlord and dismissed the complaint with prejudice. On appeal, a divided panel of the North Carolina Court of Appeals reversed the decision and held that the provision of the lease was ambiguous in that it did not clearly reflect the intention of the parties to bar negligence claims. The landlord filed an appeal to North Carolina Supreme Court based on the dissent in the Court of Appeals and for discretionary review of additional issues, which the Court allowed.

In its analysis of the case, the North Carolina Supreme Court discusses well-established principles of North Carolina law regarding the interpretation of contracts and, more specifically, provisions in contracts which exempt parties from liability – so-called “exculpatory” clauses. The Court cites to prior decisions which held that the intent of the parties is the deciding factor in contract interpretation cases.

Also, the Court states that contract provisions which exempt individuals from liability for their own negligence are not favored in the law. As a result, such provisions will not be construed to exempt a party from liability for its own negligence or the negligence of those acting for that party in the absence of explicit language clearly showing that this is the intent of the parties.

So, when a provision that exempts a party from liability for its own negligence is well drafted, and the intention of the parties is clearly and unambiguously shown, the provision exempting the party from liability will be upheld.

With regard to the exculpatory language of the lease in question in Morrell, the tenant acknowledged the broad and expansive nature of the language while also arguing that the breadth of the clause did not satisfy the general rule that such clauses must contain explicit language which clearly shows the intent of the parties to exclude liability. The Court was not persuaded and stated,

[Tenant’s] chameleonic construction of this contractual language is unworkable. Given the ‘broad and expansive’ nature of the phrase ‘all claims and liabilities . . . regardless of the cause of damage or loss,’ it is a challenging exercise to conjure up language in an exculpatory clause that would meet [tenant’s’] implied standard for unambiguity regarding waiver of negligence-based claims other than to require such a waiver to explicitly mention the term ‘negligence.’

The parties had agreed that the hazard of flooding which caused the tenant’s damages was covered by insurance. For this reason, the Court found that the exculpatory language of the lease barred the tenant from bringing an action against the landlord for all claims and liabilities caused thereby, including business losses.

The tenant also argued that the exculpatory provision was limited by language contained in another provision of the lease which required the tenant to maintain insurance and to indemnify the landlord. The Court stated that, in effect, the tenant was asking the Court to add limiting language to the exculpatory clause based on inferences made from the separate insurance clause. The Court rejected the argument and stated,

This Court cannot creatively interpret the parties’ actual lease agreement in the manner urged by [tenant], and must instead enforce the parties’ intent as evidenced by the clear and explicit language of the lease.

The Court was very clear that North Carolina Courts must enforce contracts as written and may not, under the pretext of construing an ambiguous term, rewrite the contract for the parties.

The bottom line is that disputes over the interpretation of provisions in commercial leases can potentially be avoided if issues like the one describe in Morrell are thoroughly addressed and the intention of the parties is explicitly and unambiguously stated in the lease.

As always, those who need assistance with drafting commercial leases, or with a dispute over the interpretation of the terms of a commercial lease, should consult an attorney who is experienced in the area of drafting commercial leases or litigating commercial disputes.

This post was written by Eric J. Remington of Ward and Smith, P.A.

Read more on commercial lease agreements on the National Law Review’s Real Estate page.

Full Enforcement of REAL ID Act Set for October 1, 2020

Because some of the 9/11 terrorists used fraudulent driver’s licenses to travel, Congress passed the REAL ID Act in 2005 to comply with the 9/11 Commission’s recommendation that the federal government establish minimum standards for the issuance of forms of identification, such as state driver’s licenses. After many starts, stops, and delays, the deadline set by the government for full enforcement of the Act is October 1, 2020. By that date, individuals must have compliant IDs in order to access certain federal facilities, enter nuclear power plants, and, importantly, board any commercial aircraft – even for in-country flights.

Acceptable identification would include passports, border ID cards, trusted traveler cards, permanent resident cards, and REAL ID-compliant driver’s licenses, among others. For a state driver’s license to be REAL ID-compliant, states must verify that the individual applying for the license is legally in the U.S. and biometrics were used for identification purposes. This was easier said than done. It required setting up new databases and new technologies. Not only is that an expensive proposition for states, many have expressed privacy concerns and some state legislatures blocked compliance.

While most individuals have been able to board aircrafts with state-issued driver’s licenses if the state was compliant with REAL ID or if the state was granted an extension to become compliant, by October 1, 2020, individuals must have identification compliant with REAL ID standards to even pass through security. Minors under 18, travelling with an adult with REAL ID-compliant identification, will not need such documentation.

Most, but not all, REAL ID-compliant driver’s licenses have a black or gold star on the front. States will not automatically send individuals compliant driver’s licenses. Individuals must apply in person and bring identifying documentation, such as a birth certificate or a passport. Individuals with a passport, or one of the other designated documents, may not need a REAL ID-compliant driver’s license. Although DHS has not recommended which form of identification is “best,” the State Department has been encouraging all U.S. citizens to apply for passports. Currently, about 40 percent of Americans have passports. Of course, passports are more expensive than REAL ID-compliant driver’s licenses, but they serve other purposes, such as for international travel.

TSA has launched a public-awareness campaign, including new signs that will be popping up at airports around the country.

This post was written by Brian E. Schield of Jackson Lewis P.C.

And Here Come the Lawyers: Securities Fraud Suits Commence Private Litigation Phase of Danske Bank Scandal

More Allegations of Nordic Malfeasance Surface as Private Party Lawsuits Beset Danske Bank and SwedBank Gets Sucked into Unfolding Scandal

“Something was indeed rotten in the state of Denmark.” – Olav Haazen

In what is perhaps the least surprising development in the sprawling, continuously unfolding Danske Bank (“Danske”) money laundering scandal, investor groups have filed private securities fraud actions against the Denmark-based bank and its top executives: first in the United States District Court for the Southern District of New York then, most recently, in Copenhagen City Court in Denmark. These suits coincide with an announcement from the Securities and Exchange Commission (“SEC”) that it, too, was opening its own probe of potential securities and Anti-Money Laundering (“AML”) violations at Danske that could result in significant financial penalties on top of what could be the enormous private judgments. More significantly, the Danske shareholder suits and SEC investigation illustrate a second front of enormous exposure from a securities fraud standpoint for banks involved in their own money laundering scandals and a rock-solid guaranteed template for future investors similarly damaged by such scandals.

As we have blogged here, here and here, the Danske scandal – the largest alleged money laundering scandal in history – has yielded criminal and administrative investigations in Estonia, Denmark, France and the United Kingdom and by the United States Department of Justice. Those investigations have focused primarily on Danske’s compliance with applicable AML regulations, as well as the implementation and effectiveness of those regulations. The SEC and civil plaintiffs now have opened a new line of inquiry focusing less on the institutional and regulatory failures that yielded the scandal and responsibility for them and more on the damage those failures have caused Danske investors.

Meanwhile, banking stalwart Swedbank is reacting, with mixed success at best, to allegations that suspicious transactions involving billions of Euros passed from Danske’s Estonian branch through Swedbank’s own Baltic branches — allegations which have produced a controversial internal investigation report, a law enforcement raid, the loss of the bank’s CEO, and plunging stock value.

Background

The Danske story has been told many times. Between 2007 and 2016, at least 200 billion Euros were laundered through Danske’s Estonia branch primarily by actors connected to the former Soviet Union. During that time, numerous red flags allegedly were ignored by Danske operatives permitting countless suspicious transactions to flow through the bank unabated. Ultimately, a whistleblower alerted Danske management of his concerns over the suspicious transactions, prompting an internal investigation that ultimately revealed the massive scope of the money laundering operation.

The Securities Fraud Angle

While initial investigations have examined how a substantial European bank and the regulators responsible for overseeing it could miss or ignore thousands of suspicious transactions channeling hundreds of billions of illicitly-gained Euros to the West, the bank’s investors and the SEC are attempting to hold the bank accountable for misleading investors concerning what it knew of the Estonian money laundering and what it meant to the bank’s overall bottom line. When the results of the Danske internal investigation were announced in October 2018, revealing for the first time the full scope of the scandal, Danske’s share value cratered. Ultimately, Danske’s share price halved and investors in Denmark holding direct shares in the bank and foreign investors holding depositary shares lost almost $9 billion.

Plumbers & Steamfitters Local 773 Pension Fund v. Danske Bank, et al.

On January 9, 2019, the Plumbers & Steamfitters Local 773 Pension Fund filed a class action complaint (the “SDNY Action”) on its own behalf and on behalf of purchasers of Danske Bank American Depositary Receipts (“ADRs”) between January 9, 2014 and October 23, 2018. An ADR is a security that allows American investors to own and trade shares of a foreign company, created when a foreign company wants to list its shares on an American exchange. The company first sells its shares to a domestic branch of an American brokerage. Then those shares are deposited with a depositary bank, a United States bank with foreign operations that acts as a foreign custodian that, in turn, issues depositary shares to the purchasing broker. The depositary shares are then sold on an American exchange. Depositary shares are derivatives – they represent a security issued by the foreign company and their value derives from the share value of the foreign company. Thus if, for instance, the foreign company became embroiled in a money laundering scandal of unprecedented magnitude, and if that scandal had a deleterious effect on the company’s stock, it would create a coextensive loss in value to the ADR. As it happens, the American class of Danske investors who brought the SDNY Action have alleged this precise scenario.

The SDNY Action presents a standard Section 10(b) and Rule 10b-5 fraud claim (as well as a claim for control person liability under Section 20(a) of the 1934 Act) against Danske and its chief executives centered on the bank’s alleged knowledge of and failure to disclose the Estonian money laundering since 2014. According to the complaint, the deception took two forms.

First, in 2014, Danske executives became aware that billions of dollars in illegal transactions were flowing through the Estonian branch and generating significant profits for the branch and the bank generally. Yet, armed with the knowledge that its “outsized profits” were the result of illegal money laundering, Danske issued annual reports in 2014 to 2016 to its investors in which it “attributed the results to Danske Bank’s purported ongoing operation and strategic prowess, rather than to the money laundering that the whistleblower had already disclosed to Dansk Bank’s senior executives.” Danske’s concealment of the true basis for its financial performance permitted its shares to trade at artificially inflated prices. Share prices were further inflated when Danske, relying on its financial performance (driven by its processing of stolen Russian money) sought and obtained several corporate debt rating increases that facilitated its raising hundreds of millions of dollars by issuing and selling bonds in the European bond markets.

Second, in February 2017, rumors began to spread concerning Danske’s Estonian bank operations. Danske initially downplayed these rumors, releasing a statement that “[s]everal media today report on a case of possible international money laundering, and Danske Bank is mentioned as one of the banks that may have been used. For Danske Bank, the transactions involved are almost exclusively transactions carried out at out Estonian branch in the 2011-2014 period.” The statement continued to tout the significant steps Danske had taken since 2014 to combat money laundering and the success of those efforts. Later, in September 2017, as reporting increased on Danske’s involvement in money laundering, it issued another release, stating that it had “expanded its ongoing investigation into the situation at its Estonian branch” and following “a root cause analysis concluding that several major deficiencies led to the branch not being sufficiently effective in preventing it from potentially being used for money laundering in the period from 2007 to 2015.”

From there the scandal broke in waves of investigations, fines, management departures, scaled-down and closing operations, and an ever-increasing total figure culminating in a Wall Street Journal report in October 2017 on Danske’s investigations pegging the total amount of illicit transactions at 200 billion Euros involving upwards of 15,000 non-resident customers.

According to the SDNY Action plaintiffs, between February 2018, “when Danske Bank ADRs traded at their Class Period high of $20.90 per share” and October 2018, when the magnitude of the scandal was revealed, “Danske Bank lost $11.40 per share in value, or 54%, erasing more than $2.793 billion in market value.” As luck would have it, the plaintiffs further note that “[a]s the U.S. SEC, DOJ and Treasury and Estonian Authorities continue to investigate, Danske Bank has built a reserve of $2.7 billion – equivalent to 85% of its 2017 net profit – to cover potential fines and reportedly continues to add to that reserve.”

The Danish Front

And Danske might be right to “continue to add to that reserve.” On March 14, 2019, a group of institutional investors filed a lawsuit against Danske in Copenhagen City Court on behalf of “[a]n international coalition of public pension funds, governmental entities, and asset managers” from Asia, Australia, Europe and North America (the “Copenhagen Action”). The Copenhagen Action was brought by the Delaware law firm Grant & Eisenhower and Florida securities fraud firm DRRT and was filed on behalf of all investors who purchased Danske securities since December 31, 2012.

Grant & Eisenhower explains in its press release, “[t]o date, more than 169 institutional investors, including many of the world’s largest pension funds, suffered substantial losses at the hands of Danske Bank unchecked laundering of funds passing through its branch in Estonia. The claimant group seeks $475 million USD in damages.” The Copenhagen Action follows the arc of the SDNY Action. As the lead attorney on the matter, Olav Haazan, describes: “Although the criminal laundering scheme flowed through the little Estonian branch, our lawsuit asserts that something was indeed rotten in the state of Denmark. . . . Danske Bank’s management engaged in a concerted cover-up of its enormous money laundering exposure, while continuing to paint a rosy picture to investors. For years, leadership made no disclosures about the problem and then misrepresented the extent of its participation in the scheme, while touting the bank’s anti-money laundering policies and procedures.”

Mr. Haazan has promised a second filing by June 1 by another group of aggrieved investors.

What – Me Worry?

Danske held its annual shareholders meeting over the course of five days after the Copenhagen suit was filed. Predictably, investors were displeased. Yet, Danske’s new Chairman, Karsten Dybvad struck a defiant tone in the face of potential civil exposure in the billions of dollars. Responding to the lawsuits, Dybvad told investors, “[i]t is our fundamental position that the bank has lived up to its information obligation. As such we don’t find any basis for lawsuits or for a settlement.” Nevertheless, according to Dybvad, “[t]he executive board has decided to waive the bonuses that could have been paid for 2018.”

Enter Swedbank

Howard Wilkinson, the Danske insider whose report launched a thousand investigations, testified that, while Danske’s role in facilitating money laundering was clear, where that money ultimately went is unknown. He went on to speculate that with the uncertainty surrounding any subsequent transactions from Danske involving laundered funds, Danske’s involvement is likely “the tip of the iceberg.” Recent events involving Swedbank have begun to take us further from the summit.

In late February, reports from Swedish broadcaster SVT revealed that between 2007 and 2015, suspicious transactions involving billions of Euros passed from Danske’s Estonian branch through Swedbank’s own Baltic branches. Swedbank’s shares fell nearly 20% on this news. Swedbank then hastily commissioned an internal investigation that yielded a widely lambasted and heavily redacted report from Forensic Risk Alliance concluding that an undisclosed number of suspicious Danske customers were also Swedbank customers and those customers moved some amount of money through Swedbank. From there, the Swedbank story has predictably exploded in size and scope.

First, on March 26, 2019, Swedish broadcaster SVT, which initially reported on the Swedbank scandal, reported that as much as 23 billion Euros in suspicious transactions flowed through the Swedbank Estonian operations. The following day, SVT reported that Swedbank was under investigation for withholding information from U.S. investigators about suspicious transaction and customers, including Paul Manafort and deposed Ukranian President Viktor Yanukovych. Later that day, Sweden’s Economic Crime Authority raided Swedbank’s headquarters related to an insider trading probe investigating whether the bank informed its largest shareholders of the February SVT report in advance.

Later still that day, news broke that Swedbank is under investigation by the New York Department of Financial Services for providing investors with misleading information concerning the money laundering scandal. Finally, March 27, 2019 was capped with an announcement that the Economic Crime Authority was also investigating whether Swedbank misled investors and the market through communications made in the months preceding the emergence of the scandal. The bank’s shares plunged an additional 12%.

Responding to the onslaught, Swedbank CEO Birgette Bonnensen – former head of Swedbank’s Baltic operations – issued a press release intended to reassure shaken investors. Noting that “[t]his has been a very tough day for Swedbank, our employees and our shareholders” Bonnensen stated that “Swedbank believes that it has been truthful and accurate in its communications,” adding “I will do everything in my power to handle the current situation.” Ms. Bonnensen was fired by the Swedbank board the following day.

Swedbank halted trading on the Stockholm exchange that day, but not before its shares fell another 7.8%, bringing its total decline since February to over 30% – wiping away approximately 7 billion Euro of its market value.

Adding to the intrigue swirling around the Swedbank story, a legal fight has broken out between Swedbank and Swedish prosecutors concerning the contents of a sealed envelope – a report prepared by Norwegian lawyer Erling Grimstad, who was commissioned by the bank to examine its activities after the scandal came to light in February. Swedbank contends the report is protected from disclosure by the attorney-client privilege and the bank will not waive the privilege until “all foreseeable consequences are known and assessed,” stating further “[i]t is incomprehensible that the prosecutor doesn’t respect the law and instead uses media to cast suspicion over the management of the bank by implying that the management is hampering the investigation.”

In just over a month, Swedbank went from Danske spectator to the subject of its own now 135 billion Euro Estonian money laundering scandal. More details will follow when the inevitable shareholder complaints are filed.

This post was written by Terence M. Grugan of Ballard Spahr LLP.

California Estate Tax: Gone Today, Here Tomorrow?

California has no estate tax, but that could change in the near future. California State Senator Scott Wiener recently introduced a bill which would impose gift, estate, and generation-skipping transfer tax on transfers during life and at death after December 31, 2020.

California law requires that any law imposing transfer taxes must be approved by the voters. This means that, if the California Legislature approves the California bill, it will be put before the voters at the November 2020 election.

For a time, California imposed a “pick up tax,” which was equal to the credit for state death taxes allowable under federal law; however, federal tax legislation phased this credit out completely in 2005, effectively phasing out any California estate tax. California has not in recent memory, if ever, had a statewide gift or generation-skipping transfer tax.

Under the proposed California bill, like the federal regime, all California transfer taxes will be imposed at a 40% rate. The good news is that the taxpayer will be granted a credit for all transfer taxes paid to the federal government, so there will be no double taxation. The bad news is that, unlike the federal regime where the basic exclusion amount for each type of transfer is $11,400,000 and is adjusted for inflation, the basic exclusion amount for each type of transfer in California will be $3,500,000 and will not be adjusted for inflation. With the federal exclusion rates rising every year, advanced estate planning techniques to minimize such taxes have become something that fewer and fewer people have had to worry about. If the California bill passes, any person who has assets valued in excess of $3,500,000 could be subject to a 40% California transfer tax during life or at death. Moreover, with a full credit for federal transfer taxes, only estates between $3,500,000 and $11,400,000 will be subject to the California tax. Thus, a California resident with an estate of $100,000,000 would pay the same California estate tax as someone with an estate of $11,400,000.

As drafted, the California bill appears to have no marital deduction; however, this is most likely an oversight and should be corrected in future revisions of the California bill. The goal of the California bill is to impose transfer taxes on wealthy Californians equal to what they would have paid prior to the implementation of the increased exemption rates at the end of 2017. As the marital deduction existed when exemption rates were lower, eliminating the marital deduction at the first death would not be aligned with the purpose of the California bill.

All transfer taxes, interest, and penalties generated by the California bill would fund the proposed Children’s Wealth and Opportunity Building Fund, a separate fund in the State Treasury, which will fund programs to help address socio-economic inequality.

This post was written by Joyce Feuille of Mitchell Silberberg & Knupp LLP.

Read more news on the California Estate Tax on our Estate Planning page.

EPA Issues New Emergency Response Requirements for Community Water Systems

On March 27, 2019, The Environmental Protection Agency (EPA) published the Federal Register Notice for New Risk Assessments and Emergency Response Plans for Community Water Systems describing the requirements and deadlines for community (drinking) water systems to develop or update risk and resilience assessments (RRAs) and emergency response plans (ERPs) under America’s Water Infrastructure Act (AWIA) which was signed into law on October 23, 2018 and amends the Safe Drinking Water Act (SDWA). Additionally, as described below, preparation of an ERP will enable owners or operators of community water systems to apply for grants from EPA for fiscal years 2020 and 2021.

Covered water systems. Community water systems that serve more than 3,300 people are covered by these requirements. EPA interprets the population served to mean all persons served by the system directly or indirectly, including the population served by consecutive water systems, such as wholesalers.

Deadlines. Each covered Community Water System completing an RRA and ERP must send certifications of completion by the dates listed below, and then review for necessary updates every 5 years thereafter:

Population Served by the Community Water System	Risk and Resilience Assessment (RRA) Certification	Emergency Response Plan (ERP) The dates below are 6 months from the date of the RRA certification, based on a utility submitting a risk assessment on the final due date. Depending on actual RRA certification, ERP due dates could be sooner.
≥100,000	March 31, 2020	September 30, 2020
50,000-99,999	December 31, 2020	June 30, 2021
3,301-49,999	June 30, 2021	December 30, 2021

Risk and Resilience Assessment Requirements. Each covered community water system must assess the risks to, and resilience of, its system including:

risk to the system from malevolent acts and natural hazards
resilience of the pipes and constructed conveyances, physical barriers, source water, water collection and intake, pretreatment, treatment, storage and distribution facilities;
electronic, computer, or other automated systems (including the security of such systems) which are utilized by the system;
monitoring practices of the system;
financial infrastructure of the system;
use, storage, or handling of various chemicals by the system; and
operation and maintenance of the system.

Emergency Response Plan Requirements (ERP). No later than six months after certifying completion of its risk and resilience assessment, each system must prepare or revise, where necessary, an emergency response plan that incorporates the findings of the assessment. The ERP must include:

strategies and resources to improve the resilience of the system, including the physical security and cybersecurity of the system;
plans and procedures that can be implemented, and identification of equipment that can be utilized, in the event of a malevolent act or natural hazard that threatens the ability of the community water system to deliver safe drinking water;
actions, procedures, and equipment which can obviate or significantly lessen the impact of a malevolent act or natural hazard on the public health, safety, and supply of drinking water provided to communities and individuals, including the development of alternative source water options, relocation of water intakes, and construction of flood protection barriers; and
strategies that can be used to aid in the detection of malevolent acts or natural hazards that threaten the security or resilience of the system.

The Federal Register Notice indicates that EPA is not requiring water systems to use any designated standards or methods to complete RRAs or ERPs, provided all of the requirements of the SDWA and AWIA are met. AWIA already defines resilience and natural hazards. EPA will provide additional tools to foster compliance with its provisions and baseline information regarding malevolent acts no later than August 1, 2019. With respect to the latter, it is anticipated that the agency will include consideration of acts that may (1) substantially disrupt the ability of the system to provide a safe and reliable supply of drinking water; or (2) otherwise present significant public health or economic concerns to the community served by the system.

Potential Impacts & Next Steps. Preparation of an ERP will enable the owners or operators of community water systems to apply for grants under the Drinking Water Infrastructure Risk and Resilience Program, under which EPA may award grants in fiscal years 2020 and 2021. If consistent with its ERP, a community water system may apply for grant funding for projects that increase resilience, such as:

Purchase and installation of equipment for detection of drinking water contaminants or malevolent acts;
Purchase and installation of fencing, gating, lighting, or security cameras;
Tamper-proofing of manhole covers, fire hydrants, and valve boxes;
Purchase and installation of improved treatment technologies and equipment to improve the resilience of the system;
Improvements to electronic, computer, financial, or other automated systems and remote systems;
Participation in training programs, and the purchase of training manuals and guidance materials relating to security and resilience;
Improvements in the use, storage, or handling of chemicals by the community water system;
Security screening of employees or contractor support services;
Equipment necessary to support emergency power or water supply, including standby and mobile sources; and
Development of alternative source water options, relocation of water intakes, and construction of flood protection barriers.

The EPA is currently developing a comprehensive training schedule, which will include both classroom and webinar options.

This post was written by Terese (T.C.) Richmond and Gwendolyn Keyes Fleming of Van Ness Feldman LLP.

Read more water infrastructure news on our environmental type of law page.

340B Drug Ceiling Prices Now Available

On April 1, 2019, the Health Resources and Services Administration (HRSA) launched a secure website that lists the maximum price drug manufacturers may charge 340B-covered entities for 340B-eligible drug purchases (the 340B Ceiling Price Site). Drug manufacturers and 340B-covered entities may access the 340B Ceiling Price Site through their HRSA Office of Pharmacy Affairs information system (the 340B OPAIS) account here: https://340bopais.hrsa.gov/

Since the creation of the 340B program in 1992, participating covered entities could not verify whether they received the correct price for medication purchased through the program. In 2010, as part of the Patient Protection and Affordable Care Act, Congress directed HRSA to create a secure database that lists the 340B ceiling price. Nearly nine years later, HRSA launched the 340B Ceiling Price Site which allows covered entities to now access verifiable 340B drug pricing information.

The 340B ceiling price is statutorily defined as a drug’s average manufacturer price (AMP) of a drug reduced by the unit rebate amount (URA). The URA is calculated by dividing the drug’s Medicaid drug rebate amount (DRA) by the AMP. The 340B ceiling price can be calculated as AMP – (DRA/AMP).

To populate the 340B Ceiling Price Site, HRSA obtains AMP and URA information from the Centers for Medicare and Medicaid Services (CMS), as well as a third-party drug pricing publisher, First Databank. Manufacturers are also tasked with providing pricing information to HRSA during quarterly price reporting windows, which will last for two weeks each calendar quarter. If there is a discrepancy between HRSA’s data and manufacturer reported data, the manufacturer may either: (1) accept HRSA’s data as its own, (2) refuse to edit the manufacturer data and provide explanations for each discrepancy, or (3) edit the manufacturer data and provide reasoning for any remaining discrepancies. After resolving pricing discrepancies, HRSA will publish the calculated 340B ceiling price to the 340B Ceiling Price Site.

Covered entities’ access to the 340B Ceiling Price Site is limited to the covered entity’s authorizing official (AO) and primary contact (PC). AOs and PCs are strictly prohibited from sharing 340B pricing information outside of their organization and from exporting pricing information from the 340B Ceiling Price Site. They must attest to their compliance with these obligations each time they log into the 340B Ceiling Price Site.

Although the 340B Ceiling Price Site provides covered entities with valuable pricing information, covered entities are reminded that the price they pay for 340B-eligible drugs could differ from the 340B ceiling price depending upon the covered entity’s wholesale pricing contract terms. The price paid for 340B eligible medications may vary for a number of reasons, including wholesale cost-minus/plus calculations and the availability of sub-340B ceiling pricing for drugs through the 340B Prime Vendor Program.

This post was written by Bryan P. Murray and Jennifer Orr Mitchell of Dinsmore & Shohl LLP.

Read more drug pricing news on the Health Care type of law page.

Product Liability in the Internet of Things

When California enacted SB 327 last year, it became the first state to regulate Internet of Things (IoT) devices, which refer to physical devices that are connected to the internet. Beginning next January, the new law will require manufacturers of IoT devices sold in California to implement reasonable security features that protect the software, data, and information contained within them. While the law regulates only the minimum security standards for IoT devices, its definition of a “connected device” (i.e., an IoT device) may impact product liability claims because “connected devices” are physical objects and not technology. SB 327’s definition suggests that manufacturers of the software in IoT devices may not be held strictly liable for software defects, because the law aligns with and reinforces the view of most courts that software is not a product, but a service.

A broad concept, the IoT comprises billions of devices worldwide. It includes everything from cell phones and tablets to smart speakers that respond to voice commands, smart refrigerators that help keep track of the food inside them, and even smart collars that track a dog’s fitness levels. There are wearable health monitors that send a patient’s real-time medical information directly to a health care professional, and smart pills that help keep track of the time when a patient last took one. If a product can be connected to the internet, it can become an IoT device.

Among other things, SB 327 requires manufacturers of “connected devices” to equip them with “reasonable security features.” The law defines a “connected device” to include only “physical objects,” which is significant because IoT devices combine a physical object with technology that changes the nature of the device. For example, a regular lamp is not part of the IoT. But when a manufacturer installs technology that connects the lamp to the internet and allows it to be turned on or off or dimmed by a tablet or smart phone, then the lamp becomes an IoT device. As written, SB 327 may exclude manufacturers of the intangible technology – such as software – from its requirements.

Combining a physical object and an intangible technology also creates a novel issue when it comes to strict product liability principles, which typically hold that a product manufacturer may be strictly liable for a product’s defect. The first task in a strict product liability case is to identify the product. In the context of a device that has no internet connectivity, the answer is straightforward. If a ladder is defective and causes an injury, the ladder’s manufacturer may be held strictly liable because a ladder is the product. But when it comes to IoT devices, the line may be blurred. Almost always, the software part of the IoT device is “manufactured” by a separate entity from the entity that manufactures the physical object. If the IoT device proves to be defective, the question becomes which entity may be held strictly liable.

A real-world example illustrates the issue. Medical professionals today are beginning to use implantable cardiac devices that transmit data directly from the device to the health care provider, which allow the medical professional to directly monitor the patient and device (For more information on these medical devices and other issues that surround them, see our previous blog post here). The benefits of this technology are obvious. It allows for real-time observation by medical professionals, which makes patients safer and reduces the need for long visits to the doctor’s office. But internet-based monitoring also may come with some risks that the statute attempts to address. For example, as the device is connected to the internet, it may be vulnerable to unauthorized access. Additionally, a software defect could potentially misread data, corrupt information, or even cause the device to malfunction.

If the defect is in the physical object of the device, then the entity that manufactured the device may risk being held strictly liable. But if the defect is in the software, the answer is less apparent because courts have not clearly indicated whether software is a product for purposes of strict product liability. Most observers expect courts to treat software in IoT devices as a service rather than a product, because for UCC purposes courts typically treat custom-made software (like that in IoT devices) as a service rather than a good. SB 327 aligns with this view and provides additional fuel for the argument that software is not a product.

The California Legislature may have placed the burden on an IoT device’s physical manufacturer to ensure safety when it comes to data stored inside the device. But physical device manufacturers may yet argue that the software was a component product when it comes to strict liability issues. Time will tell how courts will address that argument.

This post was written by Gregory Dickinson and Jeffrey Skinner of Schiff Hardin LLP.

Cincinnati City Council Passes Ordinance Prohibiting Salary History Inquiries

In a thinly veiled attempt to steal the spotlight from Cleveland, the new destination city for the National Football League, on March 13, 2019, the Cincinnati City Council passed Ordinance No. 83-2019, titled Prohibited Salary History Inquiry and Use, barring employers from inquiring about or relying on job applicants’ salary histories. It is scheduled to become effective in March 2020, and it applies to private employers with 15 or more employees in the city of Cincinnati.

The ordinance makes it “an unlawful discriminatory practice for an employer or its agent to:

1. Inquire about the salary history of an applicant for employment; or
2. Screen job applicants based on their current or prior wages, benefits, other compensation, or salary histories, including requiring that an applicant’s prior wages, benefits, other compensation or salary history satisfy minimum or maximum criteria; or
3. Rely on the salary history of an applicant in deciding whether to offer employment to an applicant, or in determining the salary, benefits, or other compensation for such applicant during the hiring process, including the negotiation of an employment contract; or
4. Refuse to hire or otherwise disfavor, injure, or retaliate against an applicant for not disclosing his or her salary history to an employer.”

The ordinance does not limit employers from asking applicants “about their expectations with respect to salary, benefits, and other compensation, including but not limited to unvested equity or deferred compensation that an applicant would forfeit or have cancelled by virtue of the applicant’s resignation from their current employer.” Ordinance No. 83-2019 requires that, following a conditional offer of employment, upon request, the employer must provide the conditional offeree the pay scale for the position. The ordinance provides a private right of action to enforce the law. Remedies for violating the ordinance include “compensatory damages, reasonable attorney’s fees, the cost of the action, and such legal and equitable relief as the court deems just and proper.”

Ordinance No. 83-2019 is designed to “ensure that . . . job applicants in Cincinnati are offered employment positions and subsequently compensated based on their job responsibilities and level of experience, rather than on prior salary histories.” In reality, it reaches well beyond Cincinnati, as state and local salary history bans are proliferating. Many municipalities, cities, and states across the country have passed laws limiting salary inquiries, and legislation is pending in numerous other jurisdictions around the country.

This post was written by John Gerak of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

Read more on Equal Pay issues on the National Law Review’s Labor and Employment page.

Split Over Impact of Bristol-Myers Squibb on Class Actions Deepens

Bakov v. Consolidated World Travel, Inc. is the latest salvo in the conflict over whether the Supreme Court’s personal jurisdiction decision in Bristol-Myers Squibb applies in the class action context. As we have blogged in the past, Bristol-Myers concerned claims in California state court made by non-California residents, claims that were not sufficiently connected to California to qualify for specific personal jurisdiction on their own. The Court held that California state courts could not exercise specific jurisdiction over those claims even if they were packaged with claims by California residents in a mass tort action.

Bristol-Myers left two significant questions undecided: (1) whether the Fifth Amendment’s due process clause imposes the same jurisdictional limits on federal courts that the Fourteenth Amendment’s due process clause imposes on state courts; and (2) whether Bristol-Myers’ jurisdictional limit jurisdictional limit on state court mass actions also applies to federal court class actions.

Bakov is a Northern District of Illinois decision that answers yes to both of those questions. The plaintiffs in Bakovalleged that the defendant cruise line directed another company to place calls to the plaintiffs without their consent in violation of the Telephone Consumer Protection Act. They sought certification of a nationwide class action. The court certified a class of Illinois residents but refused to certify a nationwide class, holding that under Bristol-Myersthe court did not have specific jurisdiction over the claims of non-Illinois residents. Courts have reached sharply different conclusions as to whether the jurisdictional limit set forth in Bristol-Myers applies to class actions. Bakovjoins the minority in concluding it does.

Bakov v. Consolidated World Travel, Inc., No. 15 C 2980, 2019 WL 1294659 .

Carlton Fields Jorden Burt, P.A.

This post was written by Nathaniel G. Foell and D. Matthew Allen of Carlton Fields Jorden Burt, P.A.

Read more Class Action analysis on the litigation type of law page.

Maryland Proposes New Telehealth Psychology and Therapy Rules

Two Maryland licensing boards – the Board of Examiners of Psychologist and the Board of Professional Counselors and Therapists – issued a pair of proposed rules setting forth practice standards for mental health services delivered via telehealth technologies. The Boards previously did not have specific practice standards or rules unique to telehealth. Once finalized, psychologists, counselors, and therapists using telehealth in their services should read and apply these new requirements to their operations and service models.

The proposed rules closely mirror each other. Both apply to professionals delivering care to patients located in Maryland. Both allow a wide range of modalities, defining telehealth as the “use of interactive audio, video or other telecommunications or electronic media,” but excluding an audio only telephone conversations, email, fax or text. Both rules prohibit treatment based solely upon an online questionnaire.

The Board of Professional Counselors and Therapists rule allows therapists to conduct the initial patient evaluation via telehealth. The Board of Psychology rule requires an in-person initial evaluation unless the psychologist or psychologist associate documents in the record the reason for not meeting in person. (The rule doesn’t enumerate a list of acceptable or unacceptable reasons; it simply requires the reason to be documented.)

Professionals must confirm the identity of the client/patient, as well as the client’s location and contact information. The professional must also identify contact information for emergency services at the client’s location. Curiously, the rule issued by the Board of Professional Counselors and Therapists refers to the client’s location as the “practice setting.” While this could raise a suggestion that the client must be physically located in a clinical practice setting, it is more likely a drafting error because there is no mention of any originating site requirements in the rule.

Professionals must also identify everyone at the client’s location and confirm those individuals are permitted to hear the client’s health information. The use of the term “permitted” as opposed to “authorized or “legally authorized” and the absence of reference to any state or federal privacy law, suggests another person’s presence is subject to the client’s permission and not legal authority.

With regard to client consent to telehealth services, the Board of Psychology rule requires “written informed consent,” whereas the Board of Professional Counselors and Therapists rule requires the client’s “written and oral acknowledgement.” Both rules state that the standard for services delivered via telehealth is the same as services delivered in-person.

The Boards are considering comments and Maryland providers are awaiting the final regulations. We will continue to monitor further developments including the passage of these final rules and any changes.

This post was written by Emily H. Wein and Nathaniel M. Lacktman of Foley & Lardner LLP.

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