Esports Insights and Trends – April 2018

Leveraging its long history and extensive experience in all aspects of the sports arena, the Foley Sports Industry Team is actively immersed in the booming esports industry. Our Esports Insights and Trends will be a recurring post which is designed to deliver to esports industry insiders and watchers up-to-date information on the latest trends and developments in the fast-moving world of esports. To that end, today’s post covers a variety of topics, including the intersection of esports with privacy, traditional sports models, science, gambling, college programs, and investment activity.

The development of high school esports programs and leagues is another sign of esports entering the mainstream.

College esports programs have existed for a relatively short period of time. However, there appears to be a sudden and widespread trend of esports programs forming in colleges across the country. One of the premier esports programs at a public university (also the first public university esports program) is at UC Irvine. The UC Irvine program’s success has generated residual effects that are benefiting a younger generation as high school esports programs start to develop around Southern California. These local high school esports programs have formed the Orange County High School Esports League in an effort to improve student engagement and education. The league is largely funded by a nonprofit foundation and receives a lot of support from UC Irvine.

However, the rise of structured and organized high school esports leagues isn’t just happening on a local level. Nationally, the High School Esports League (HSEL) is focused on improving high school programs around the country while supporting high school esports athletes who want to compete collegiately. As a means to these ends, the HSEL, one of the largest esports leagues in the world, has teamed up with the National Association of Collegiate Esports (NACE) in order to “create a stronger path for high school esports athletes to move into the collegiate ranks as scholarship athletes.” This partnership should benefit both the NACE and the HSEL, as both organizations have a tremendous interest in the recruitment of high school esports athletes into the collegiate ranks.

Esports-focused venues are being built all over the world.

There is no greater monument to the esports industry’s tremendous recent growth than the literal monuments and buildings being built to support and facilitate esports programs and events. As with traditional sports stadiums and arenas, local municipalities are investing in esports by way of esports venues. Recently, Cyberport, a technology start-up incubator managed by a government-owned company in Hong Kong, set aside nearly $6.4 million to invest in venues for esports. The government has done this in the hope of becoming a regional and international destination for esports. A planned 4,000-square foot venue should help accomplish this mission.

While Hong Kong’s investment in esports venues may be setting an example for other cities around the world, it is actually behind the curve compared with the western Chinese city of Chingqing. In December, Chingqing opened the world’s first purpose-built esports arena and is now beginning the second phase of the massive project. The innovative arena seats 7,000 people and features glass walls with LED screens that allow the outside of the building to transform into a giant screen. Eventually, the arena will also include a hotel and an incubation center.

Support for esports in China isn’t just coming from municipalities either. The China Sports Venue Association (CSVA) recently added an esports department to “focus on the establishment of professional esports venues in China.” Organizations like the CSVA act as a catalyst for the formation of esports venues by pairing geographic markets with an interest in esports with development partners that are interested in building new or repurposing existing structures into esports-centric venues.

Massive investments in esports venues aren’t just happening in Asia, however. Back in the U.S., Arlington, Texas, has announced plans to build the largest esports stadium in North America. The city believes this investment will pay off by spurring new development and engaging the community while also attracting esports tourism. It may be only a short period of time before other U.S. cities start to follow suit in a big way.

Esports markets that were once behind the rest of the world are quickly starting to catch up.

Japan is one such market that is quickly making strides to become a world leader in esports. After years of suffering from a gambling regulation that inadvertently forbade esports tournaments with any significant prize offerings, Japan has finally legalized esports tournaments with large prize pools. The removal of this legal hurdle should instantly spur growth of the competitive esports scene in Japan. In fact, the chief investment officer of Hong Kong-based Oasis Management Co., is an early believer that competitive gaming can become an extremely lucrative business in Japan. The hedge fund boss Seth Fischer is buying up stock in companies like Capcom and Square Enix Holdings in an effort to capitalize on a market that has yet to recognize the esports trend in Japan. While Fischer doesn’t expect esports to immediately send stocks skyrocketing, he does expect that esports will become a significant earnings driver in the next few years.

Another burgeoning esports market is India. Already one of the top five countries in the world for mobile gaming, India’s blossoming esports scene should soon start to rival the Indian mobile game scene (which is predicted to be worth more than $1 billion by 2020). India is now firmly in the sights of major esports companies and organizations as they start to invest in the country in an attempt to stabilize and grow esports there.

The viability of esports in other global markets has been apparent to those in the traditional sports industry too, and it should be expected that traditional sports entities will try to use esports to penetrate foreign markets. NBA Deputy Commissioner and Chief Operating Officer Mark Tatum has hinted as such by suggesting that future NBA 2K league expansion teams could be based in foreign markets. Tatum’s proclamation of turning the NBA 2K League into a “truly global sport” comes just weeks before the inaugural season of the league is set to tip off. This notion may not be too far-fetched as the game appears to hold some international appeal and other esports franchises have already had success with international leagues.

New esports titles and organizations have the potential to quickly shift the market.

Let’s look at the recent emergence of Last Man Standing-type games such as Fortnite and PlayerUnknown’s Battlegrounds. These are games that have basically come out of nowhere to become some of the most-played games on the planet. Fortnite came out last July and was an instant success. The game’s popularity became evident a few weeks ago when popular streamer Ninja teamed up with artists Drake and Travis Scott, as well as NFL wide receiver JuJu Smith-Schuster, to play Fortnite and, in the process, log 600,000 concurrent viewers, a streaming service record. Obviously, the appearance of some very popular celebrities had a lot to do with the widely watched streaming session, but the fact that this even happened signals a shift in the landscape of pop culture.

Another Last Man Standing-type game, H1Z1, predates Fortnite and PlayerUnknown’s Battlegrounds. However, despite once being fairly successful in terms of its number of daily players, the game has recently experienced an almost 90 percent decline in playership. The timing of this decline is unfortunate, as the publishers of the game look to kick off the H1Z1 Pro League, which should serve as an interesting case study in esports leagues. If the H1Z1 Pro League can find a way to thrive, despite having fewer than 10,000 daily players, it would suggest that there is more to a successful esports league than the inherent popularity of a game. If it fails, then it would appear that organic interest in a game is necessary to support a successful league.

While Last Man Standing-type games and first-person shooters seem to be dominating the esports industry, fighting games appear to be making a comeback in terms of popularity that could lead to some becoming esports staples. Fighting games are experiencing record sales and we’re starting to see sponsors and developers support them in the same fashion as other successful esports titles. The factors pushing fighting games up the esports ladder aren’t all external either. Capcom is a developer that has long been successful for its fighting game titles but has never really pushed an esports agenda . . . until now. Capcom’s CEO announced that the company intends to make 2018 “Esports Year One” as the company “move[s] forward to promote esports with the full force of [the] organization.” That’s a strong statement coming from a company that has the reputation and resources to make significant moves in the esports industry.

The attack on the status quo of esports.

The state of affairs in the esports industry is presently under attack, for better or worse, on a number of fronts. Due to recent events, including several school shootings, violence in video games is being made the scapegoat by some politicians for the fact that some people behave so heinously. One lawmaker in Rhode Island wants an additional 10 percent tax on the sale of violent games that have a rating of Mature. The extra taxes would purportedly go to fund additional counseling and mental health services in schools.

Even the president is getting involved in the discussion of violence in video games and its effect on children. Recently, the White House hosted representatives and critics of the video game industry for a discussion about violence in video games. The meeting started with a compilation of violent video scenes, presented in sequence without context, and was followed up with blame shifting and allegations of agenda pushing. It will be interesting to see whether either the legislative or executive branch assumes a more aggressive stance against violent video games.

Not only is violence in games being questioned, but so are certain gaming mechanisms. Loot boxes have been the topic of debate for several months and the Entertainment Software Rating Board (ESRB) has now taken steps to address the issue. The ESRB is tasked with assigning ratings and content descriptors to video game titles, such as “M” for Mature or “may contain intense violence.” Now the rating agency will include a content descriptor for Loot Boxes in an effort to educate (or warn) consumers, young gamers, and parents. This type of treatment is going to further the perception that Loot Boxes need to be regulated, but perhaps this will be the extent of the regulation required.

A look at some notable numbers from the last month.

The numbers in these articles are telling of much more than just investment amounts or net profits. The statistics and figures in these articles are suggestive of current or impending trends in the industry. The following articles detail noteworthy investments and revenue successes from various esports organizations:

© 2018 Foley & Lardner LLP

An Introduction to Illinois Audits and Appeals

There’s no way around it: Illinois is a complicated state in which to do business. From a tax perspective, there are so many nuances and units of government that form a complicated regulatory web. But as long as Chicago continues as the economic hub that it is, most multi-state businesses will be forced to understand the nuances of the state and local rules in Illinois. This post is the first in a series that will address how to navigate even the most byzantine aspects of Illinois’s tax structure. More specifically, this post will address the unique rules regarding tax audits and appeals throughout each stage in the state. While each business’s facts are unique, this general framework should help any business orient itself in Illinois.

Audit Initiation

Audits conducted by the Illinois Department of Revenue (“DOR”) should begin with a Notice of Audit Initiation. Such notices will typically identify the tax type and audit periods. Frequently, but not always, the notices will also include a list of books and records that are required to initiate the examination.  When the notice includes such requests, it will also include a date by which the taxpayer should respond. This date is not jurisdictional, and the audit is intended to be a collaborative effort whereby the auditor should be willing to grant any reasonable extensions the taxpayer requests. The notice should identify both the revenue auditor as well as the audit supervisor. Of course, as with any jurisdiction, maintaining an open line of communication with the auditor is crucial. Finally, the notice should include an attachment that describes the taxpayer’s rights during audit as well as an explanation of the taxpayer’s options after the audit is resolved.

Informal Conference Board

Whether an audit has been fully resolved, however, can be somewhat tricky in Illinois. During an audit, the DOR might provide a taxpayer with a “Proposed” Notice of Liability, Claim Denial or Deficiency.  Proposed notices do not trigger a taxpayer’s formal appeal rights. Instead, they allow a taxpayer to either agree to an auditor’s proposed changes or to seek review at the Informal Conference Board (“ICB”) prior to a final decision. See  86 Ill. Admin. Code 215.100. Note that the ICB is generally considered part of the audit process. Consequently, a taxpayer may continue to receive information document requests from the auditor during the pendency of the ICB petition. It is typical for issues to arise after the ICB petition is filed such that the scope of the audit may expand.

Where a taxpayer disagrees with a proposed notice, it may file a Form ICB-1, Request for Informal Conference Board Review, within sixty days from the date of the notice. Again, taxpayers need not file the Form ICB-1 in order to preserve their appeal rights. Rather, the ICB may function as a preliminary forum in which to resolve a dispute between the taxpayer and the DOR.

The ICB is composed of the General Counsel for the DOR, the Chairman of the Board of Appeals (which will be addressed in a separate post), the Manager of the Audit Bureau, and at least three employees of the DOR designated by the Director of the DOR.  See 86 Ill. Admin. Code 215.105. Taxpayers may represent themselves at ICB, but an attorney with an executed Power of Attorney may also represent them. The ICB is not subject to the constraints of the Illinois Administrative Procedure Act, and depending on the nature of the issues presented to the ICB, the conferences may vary in the degree of formality. At the conclusion of the ICB process, the ICB will issue an “Action Decision” that will lead to the issuance of a final, appealable notice.

In my experience, ICB can be a very productive avenue for certain disputes, but is not an optimal route for all disagreements with an auditor’s proposed adjustments. To the extent a taxpayer disagrees with how an adjustment is technically accomplished, such as in the case of an auditor utilizing a distortive audit sample, ICB can be a very good means of resolving the issue. However, to the extent a taxpayer seeks to challenge a legal issue, such as the DOR’s interpretation of its own regulations or the constitutionality of a particular approach, the ICB will often not lead to a productive result for the taxpayer. Indeed, such a challenge could adversely affect a taxpayer by providing the DOR an opportunity to fortify an assessment by adding additional reasons for its adjustments or pursuing additional information from the taxpayer. This entire process also comes at an additional cost to the taxpayer.

Protesting a Final Assessment

Upon receipt of a final assessment or claim denial, a taxpayer generally has three potential courses of action in cases where the assessment or claim denial may be appealed. Taxpayers are generally required to appeal within 60 days of the issuance of a deficiency notice, notice of liability, or notice of claim denial (although the possibility of obtaining a discretionary late hearing exists). Keep in mind that the Illinois Taxpayers Bill of Rights provides a foundation or rights for all Illinois taxpayers. In cases where the tax at issue is less than $15,000, a taxpayer has the option to pursue an administrative protest. However, in cases where the tax liability at issue exceeds $15,000, administrative protests with the DOR are not available. Such matters may be resolved in one of two ways: either at the Illinois Independent Tax Tribunal (the “Tribunal”) or the Circuit Court. These two avenues are addressed in turn.

Illinois Independent Tax Tribunal

The primary difference between the Tribunal and the Circuit Court is the Tribunal is not a “pay to play” forum.  Formed pursuant to the Illinois Independent Tax Tribunal Act of 2012, the Tribunal is currently composed of one Chief Administrative Law Judge and one other Administrative Law Judge (“ALJ”).  These ALJs are appointed by the Governor with the advice and consent of the Senate, and the Tribunal is a distinct agency from the DOR. Another important distinction between the Tribunal and the Circuit Court is that claims for refund must be pursued at the Tribunal; a taxpayer may not choose between the forums in the context of a refund claim. 35 ILCS 1010/1-45(d). Similarly, when a taxpayer obtains a discretionary late hearing from the DOR, the appeal must be made through the Tribunal.

In order to initiate an action at the Tribunal, a taxpayer must file a petition accompanied by a $500 filing fee. 35 ILCS 1010/1-55(a). If the taxpayer is a corporate taxpayer, it must be represented by an attorney authorized by practice before the courts of the State of Illinois. Partnerships or individuals may represent themselves, however. 86 Ill. Admin. Code 5000.305. In instances where a petition is filed by a party not represented by an attorney where required, the Tribunal will generally grant the petitioner an additional thirty days to file a corrected petition. See Safari Express, LLC v. Illinois Dep’t of Revenue, 15 TT 88 (12/18/2015).

At the Tribunal, the DOR will be represented by the Attorney General. All discovery, requests for admission, and pre-trial procedures comport with the requirements of the Illinois Supreme Court Rules and the Illinois Code of Civil Procedure. 35 ILCS 1010/1-60; 86 Ill. Admin. Code 5000.325. Practice before the Tribunal is generally similar to practice at circuit court, the one primary difference being the convenience of appearing for statuses and the like. While certain, substantive hearings will generally be held in person, statuses, including the initial status, will generally be held via telephone. An initial status conference will be set within 60 days after the filing of the petition, and the ALJs will generally require additional status hearings every 30 to 60 days to keep cases on pace. See 86 Ill. Admin. Code 5000.320. Note that in addition to the standard procedures at the Tribunal, at any point in the proceedings, but prior to a hearing on the matter, the parties may jointly petition the Tribunal for mediation in an attempt to settle any contested issues or the case in its entirety.  In such instances, an ALJ other than the one initially assigned to the case will serve as the mediator.

All filings with the Tribunal are public, subject to certain privacy restrictions. Final decisions are rendered within 90 days of the final brief submitted in a matter, although the Tribunal may extend that period for good cause. Decisions of the Tribunal become final 35 days after the issuance of a notice of decision.  35 ILCS 1010/1-70. Appeals from the Tribunal are pursued according to the Administrative Review Law, and are made to the Illinois Appellate Court.  35 ILCS 1010/1-75.

Circuit Court

In order to protest an assessment at the Circuit Court, a taxpayer must follow the State Officers and Employees Money Disposition Act (the “Protest Monies Act”). Judicial appeals may be made in one of three potential courts: Sangamon County, Cook County, or the county in which the dispute arose. The majority of tax cases are heard in Cook County Circuit Court.  Protests in Cook County Circuit Court are heard in the Tax and Miscellaneous Remedies Section of the Law Division. At any given time, approximately four judges, one of which functions as the supervising judge, might hear tax cases.

Initiating a Protest Monies Act complaint can appear somewhat daunting at first. In order to enter circuit court, a plaintiff must make a payment in full under protest on the DOR’s forms. Within 30 days of the protest payment, the plaintiff must then file a complaint with the Circuit Court and obtain a preliminary injunction from the circuit court, enjoining the DOR and the State Treasurer from moving the protest payment made into the protest fund. The preliminary injunction must also be ordered within 30 days of the payment under protest or the Treasurer will be required to transfer the amount paid out of the protest fund into the general revenue fund. See  30 ILCS 230/2a.

In Cook County, judges will generally require the parties to convene for a status hearing on 30 to 60 day intervals. No such timeline is typically required in Sangamon County. As with the Tribunal, the DOR is represented by the Attorney General.

Practice at the circuit court is governed by the Illinois Supreme Court Rules. The rules relating to defendant’s requirement to answer, as well as rules of discovery and evidence, apply to tax cases in the same manner as other civil cases at circuit court. Appeals are generally made to the Illinois Appellate Court.

Conclusion

Like many other states, Illinois provides a number of opportunities to protest tax determinations at the audit level, in the form of administrative hearings (both with the DOR and the Tax Tribunal), and at state court. Each taxpayer is different, and the right choice for each taxpayer will be heavily dependent on the facts of each case. However, this brief introduction to the various procedural hurdles both in audit and on appeal should help taxpayers make a more informed decision as to how to proceed upon receipt of a notice of audit initiation or an assessment.

© Horwood Marcus & Berk Chartered 2018. All Rights Reserved.
This article was written by Christopher T. Lutz of Horwood Marcus & Berk Chartered

New Legislative Action on “Tip Pooling”

Congress and the President have waded into the ongoing debate regarding employers’ use of “tip pools” under the Fair Labor Standards Act (“FLSA”) by passing the Tip Income Protection Act (“TIPA”) as part of the omnibus spending bill.

The FLSA permits an employer to take a partial credit against its minimum wage obligations based on employee tips if the employee retains all of his or her tips, or they are made part of a tip pool shared only with employees who “customarily and regularly receive tips.” See 29 U.S.C. § 203(m). Thus, an employer utilizing a tip credit to comply with minimum wage obligations cannot establish a tip pool that includes non-tipped employees (e.g., back-of-the-house restaurant employees).  The FLSA left the allocation of tips unregulated where an employer did not use tip credits.

In 2011, the Department of Labor (“DOL”) issued a regulation applying the limitation on the use of tip pools to cases where the employer did nottake a tip credit and paid employees the full federal minimum wage.  See 29 C.F.R. § 531.52.  A number of federal courts concluded that the regulation was inconsistent with the text of the FLSA.  See, e.g., Marlow v. New Food Guy, Inc., 861 F.3d 1157, 1163-64 (10th Cir. 2017) (2011 DOL regulation was inconsistent with the FLSA, which did not authorize the agency to “regulate the ownership of tips when the employer is not taking the tip credit”).  However, the Ninth Circuit disagreed, reasoning that because the FLSA is “silent as to the tip pooling practices of employers who do not take a tip credit” it should defer to the DOL.  Oregon Rest. and Lodging Ass’n v. Perez, 816 F.3d 1080, 1090 (9th Cir. 2016).

In 2017, the DOL announced proposed rulemaking to rescind the 2011 regulation.  See here and here. After much deliberation regarding the proposed agency action, Congress enacted TIPA, which states, in relevant part:

“An employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.”

TIPA also provides that the 2011 regulation shall have “no force of effect.”  An employer that violates TIPA may be liable for any tip credit taken, the amount of the withheld tips, liquidated damages, and $1,100 civil penalty for each violation.

Stated simply, TIPA limits the permissible use of tip pooling for all employers irrespective of whether an employer takes advantage of a tip credit or whether its employees’ regular hourly rate exceeds the minimum wage.  However, TIPA’s language raises a number of interpretive questions, such as:

  • What does it mean for an employer to “keep tips” received by employees?  The law very likely prohibits an employer from diverting tips directly to its own coffers.  But does an employer “keep tips” by implementing a standard tip pool that does not include “managers or supervisors?”

  • TIPA does not define a manager or supervisor.  Assuming TIPA permits standard tip pools, does an employer violate the law if the pool includes modestly-paid hourly employees with minimal management responsibilities and limited or no ability to discipline employees (e.g., shift leads)?

These are a few of the questions employers with tipped employees will confront in the coming months and years as we await additional guidance from the courts and the DOL.  Employers in the restaurant and other industries should closely analyze how they distribute employee tips to ensure compliance with TIPA.

 

© Polsinelli PC, Polsinelli LLP in California
This post was written by James C. Sullivan and Brian K. Morris of Polsinelli PC, Polsinelli LLP in California.
For more on Employment Legislation, Check out the National Law Review’s Employment Law Page.

South Dakota Passes Breach Notification Law, Leaving Alabama the Only U.S. State Without a Breach Notification Law

On March 21, 2018, South Dakota Governor Daugaard signed S.B. 62, enacting the state’s first data breach notification law, which will go into effect July 1, 2018. Previously, Alabama and South Dakota were the only U.S. states without data breach notification. As of July 2018, Alabama will be the last state without a data breach notification law, though this may soon change. The District of Columbia and three U.S. territories – Guam, Puerto Rico and the U.S. Virgin Islands – also have data breach notification laws in place.

South Dakota’s law requires that any person or business that conducts business in South Dakota and owns or licenses computerized “personal information”[1] or “protected information”[2] of the state’s residents (such persons/businesses referred to as “information holders”) disclose any “breach of system security” to any South Dakota resident whose personal or protected information was, or is reasonably believed to have been, acquired by an unauthorized person.

The law gives information holders a sixty-day window (from date of discovery or notification of the breach) to notify individuals, unless law enforcement determines that the notification should be delayed. However, if the information holder holds an appropriate investigation, reasonably determines that the breach will not likely result in harm to the affected residents and notifies the South Dakota attorney general of its determination, then the information holder is not required to notify affected residents.

Additionally, information holders must notify (1) all consumer reporting agencies and (2) if the breach affects over 250 South Dakota residents, the South Dakota attorney general. This consumer reporting agency notification obligation is unique, as most state breach notification laws only require such notification if a high number of residents, for example 500 or 1,000 residents, are affected.

The law provides the state Attorney General (and, potentially, affected residents) with imposing remedies. A violation of the breach notification law is considered a deceptive act or practice under South Dakota Codified Laws (“SDCL”) § 37-24-6, South Dakota’s consumer protection law. The South Dakota attorney general may (1) “prosecute each failure to disclose” under the breach notification law’s provisions as a deceptive act or practice under SDCL § 37-24-6, (2) impose a civil penalty of up to $10,000 per day per violation and (3) avail himself of any of the remedies provided under chapter 37-24 of SDCL. South Dakota Attorney General Jackley reportedly stated that failure to be notified under the breach notification law entitles affected residents to a private right of action under SDCL § 37-24-31.

[1] “Personal information” is defined as a person’s name in combination with any of the following: (a) Social Security numbers, (b) driver’s license numbers or other government-issued unique identification numbers, (c) account, credit card or debit card numbers, in combination with any required code, PIN or information that would permit access to a person’s financial account, (d) health information as defined by HIPAA, and (e) employee identification numbers in combination with any code or biometric data required for authentication.

[2] “Protected information” is defined as (a) user names and email addresses in combination with any associated passwords or security question answers which would provide access to online accounts, and (b) account, credit card or debit card numbers in combination with any required code or password that permits access to a person’s financial account. Please note that (b) overlaps with part of the definition of “personal information,” but not completely.

© 2018 Proskauer Rose LLP.
This article was written by Tiffany Quach and Nicole Kramer of Proskauer Rose LLP

Sex, Power & the Workplace: Responding to the Skeptics

For every believer, there is a skeptic.

For the better part of 25 years, I have been questioned and challenged about sexual harassment, leading (I hope) to my deeper understanding about the everyday difficulties of tackling workplace conduct. Recently, in the wake of speaking engagements, training sessions, and panel discussions, those questions have multiplied and accelerated. Most of them are thoughtful inquiries, and I never have enough time to answer them.

Here are a couple questions that I keep hearing and my theories in response.

Why do we always talk about the women? Aren’t men victims too?

Although precision is difficult and numbers vary widely, it is universally accepted that women are more likely to experience harassment in the workplace.  In 2017, more than 83 percent of the sexual harassment complaints filed with the EEOC were brought by women. Anecdotally, most professional women have experienced conduct that could be described as sexually inappropriate.

That non-scientific evidence aside, one of the problems is that harassment has long been underreported. According the EEOC’s 2016 Select Task Force Report on Harassment, about 75 percent of women never formally report it. Additionally, the research of an Oklahoma State professor, Heather McLaughlin, reveals that by the age of 31, 46 percent of women will experience harassment.

And yes, men are victims, too. One-third of working men reported at least one form of sexual harassment according to a 2015 survey, in response to inquiries at Psychology Today.

For men or women, conduct that is unwelcome, severe or pervasive, or that interferes with an employee’s working environment is not acceptable. Not only is it against the law, it leads to lower productivity in the workplace.

Why did they wait so long to come forward?

This question tends to be code for “I don’t believe it,” or, “If it was true, she would have complained at the time,” or, “There must be some money in it now.”

As noted earlier, however, most women would rather not file a formal complaint of harassment.  And there are many reasons:  fear of retaliation, whether professionally or socially; fear of being labeled as a tattle-tale; legitimate worries that the inevitable and legally required investigation will lead to blaming the accuser. The most likely response of women to inappropriate conduct is to ignore it, do nothing, and pretend it didn’t happen.

The reason that some women are coming forward now (and trust me that many women are still not coming forward) is because courage is contagious. There is a support system of #MeToo. That does not mean that every accusation is a legally supportable claim of harassment, but it does mean that women who were once afraid, today, are less so.

When we first started examining these issues in depth several months ago, I noted the complexity of the topic and even these answers only scratch the surface. Please keep the thoughtful questions coming, and we’ll continue the conversation.

© 2018 BARNES & THORNBURG LLP
This article was written by Jeanine M. Gozdecki of Barnes & Thornburg LLP

Federal Jurors Get 25 Percent Pay Hike

For the first time in 28 years, jurors in federal court will receive a pay hike of 25 percent. That means that for each day that a person sits as a juror in federal court, he or she will receive a check for $50, up from $40 that has been in effect since 1990.

President Trump signed the bill into law that takes effect May 7. The raise was included in a bill that provided the federal judiciary with $7.1 billion in discretionary spending, an increase of $184 million from the previous fiscal year, according to a news release from the U.S. Courts that provides support to federal courts across the country.

Jurors who serve in Cook County Circuit Court receive $17.50 per day for their service.

Federal court jurors in the Chicago area serve at the Dirksen U.S. Courthouse in Chicago’s Loop. They also receive reimbursement for travel (54.5 cents a mile) as well as a paid lunch at the Fresh Seasons Cafe, on the courthouse’s second floor.

“This is an excellent result and enables the Judiciary to fulfill its mission,” James C. Duff, Director of the U.S. Courts Administrative Office in Washington, D.C., said in a statement. “We are especially pleased that Congress recognized the critical public service provided by the citizens who serve on juries as well as the attorneys who represent defendants who can’t afford a lawyer.”

 

© 2018 by Clifford Law Offices PC.
This post was written by Robert A. Clifford of Clifford Law Offices PC.

Water, Water, Everywhere: The Clean Water Act

If it isn’t already, water should be on your mind this year.  The excitement of Scituate storm surge and coastal flooding aside, the region – and the U.S. as a whole – is facing a slew of legal developments that may change how citizens, businesses, and governments operate under the federal Clean Water Act and similar state programs.  In particular, the scope of Clean Water Act jurisdiction is in play following a pair of Supreme Court decisions, as is the potential delegation of permitting authority to Massachusetts and New Hampshire, two of only four states in which the EPA administers permitting under the National Pollutant Discharge Elimination System (NPDES).

Clean Water Act Jurisdiction

Since well before Samuel Taylor Coleridge penned those famous lines in the Rime of the Ancient Mariner – “Water, water, every where, / Nor any drop to drink” – people have worried about access to clean water.  It makes sense, then, that the Clean Water Act is one of our oldest environmental laws, with its origins in the Rivers and Harbors Act of 1899.  The Rivers and Harbors Act – the nation’s very first environmental law – imposed the first “dredge and fill” requirements, made it illegal to dam rivers without federal approval, and prohibited the discharge of “any refuse  matter  of  any  kind  or  description” into “any  navigable  water  of  the  United  States, or  into  any  tributary  of  any  navigable  water.”

The Federal Water Pollution Control Act of 1948, with major amendments in 1961, 1966, 1970, 1972, 1977, and 1987, largely superseded the Rivers and Harbors Act and resulted in what we know today as the federal Clean Water Act (CWA).  And although today’s statute is very different from its 1899 precursor, one thing has remained constant: an intense and lasting fight over the scope and jurisdiction of federal regulation.  Federal CWA jurisdiction is premised on the Commerce Clause of the U.S. Constitution, and prohibits (without a permit) “dredge and fill” activities and the discharge of pollutants into “navigable waters,” which the CWA defines as “the waters of the United States.”  But what, exactly, are “waters of the United States”?

The 1870 Supreme Court decision in The Daniel Ball held that waterways were subject to federal jurisdiction if they were “navigable in fact.”  But what has never been clear is the extent to which non-navigable waters, like certain tributaries to navigable waters or wetlands, constitute “waters of the United States” such that they are subject to federal regulation.

The Supreme Court Punts (Again)

The 2006 Supreme Court decision in Rapanos v. United States represented a key turning point in CWA jurisdiction, holding that certain remote wetlands are not subject to CWA jurisdiction.  But the decision was badly fractured, with no majority of justices agreeing on a single standard for determining what, exactly, constitute “waters of the United States” such that the CWA applies.  Minor chaos ensued, as regulators and courts applied varying interpretations of Rapanos in permitting decisions and enforcement actions.

In 2015, the Obama administration attempted to clarify the scope of CWA jurisdiction by promulgating a rule known as the “Waters of the United States” (or “WOTUS”) rule that attempted to define exactly which waters were regulated by the CWA.  That rule, which was based on Justice Anthony Kennedy’s “significant nexus” test in the Rapanos decision, was quickly challenged by 31 states, numerous industries, and landowner groups.  At bottom, challengers argued that the WOTUS rule represented significant federal overreach and extended CWA jurisdiction well beyond what the Commerce Clause allows. The numerous appeals were consolidated into a single Sixth Circuit case, National Association of Manufacturers v. Department of Defense (NAM), and in late 2015 the Sixth Circuit stayed the WOTUS rule pending resolution of legal challenges.

But on January 22, 2018, the Supreme Court unanimously held that federal District Courts – not appellate courts – have jurisdiction over challenges to the WOTUS rule.  While the CWA generally requires challenges to CWA rules to be brought in district courts, there are seven situations where courts of appeal have jurisdiction.  In this case, the government argued that the challenge should be heard in the courts of appeal, under CWA Sections 1369(b)(1)(E)-(F) which allow appellate courts to hear cases related to the approval of certain effluent limits or permits, respectively.  Petitioners, on the other hand, maintained that the case should be heard in federal district court in the first instance.  In a procedural victory for the petitioners, the Supreme Court held that the WOTUS rule does not qualify for direct appellate review under CWA Sections 1369(b)(1)(E)-(F).  Following this decision, future challenges to the WOTUS rule will be brought in federal district courts, potentially with divergent outcomes around the country.  Appeals of those decisions will move to the courts of appeals, where there is yet again the possibility for inconsistency.  The upshot is a longer litigation timeline – and continued jurisdictional uncertainty – before the Supreme Court will have another chance to address the appropriate scope of CWA jurisdiction.

In the meantime, the Trump administration is working on a replacement rule for the WOTUS rule that is likely to apply the less expansive jurisdictional test described by Justice Antonin Scalia in Rapanos.  Under that interpretation, only tributaries that are “relatively permanent, standing or flowing bodies of water,” and only wetlands with a continuous surface connection to a “water of the United States” are themselves “waters of the United States” subject to CWA jurisdiction.  And on February 6, 2018, EPA and the Army Corps of Engineers promulgated a rule delaying implementation of the WOTUS rule until February, 2020.  That action preserves the Rapanos status quo (such as it is) until EPA can craft a new rule.  Ultimately, it is likely that any WOTUS replacement rule will be challenged, and the Supreme Court will then have a chance to revisit its decision in Rapanos and redefine federal jurisdiction under the CWA, a process that could easily extend past 2020.

Defer much?

On February 26, 2018, the Supreme Court weighed in again on the Clean Water Act, this time by refusing to take up a challenge to a 2017 decision by the Second Circuit that upheld a 2008 EPA rule exempting water transfers from CWA permitting requirements.  Water transfers happen when water from one waterbody is diverted into another waterbody, such as diverting a stream into a nearby lake or reservoir. Drinking water systems have conducted water transfers for decades, and EPA has never required NPDES permitting for such transfers.  But in 2008, in response to pressure by environmental groups to require NPDES permits for water transfers, EPA adopted the Water Transfers Rule expressly exempting such transfers from NPDES permitting.

Environmentalists and states challenged the Water Transfers Rule, arguing that moving water from one waterbody to another requires a permit if the “donor” water contains pollutants that would have the effect of degrading the receiving water.  Both the Obama and Trump administrations defended the rule, arguing that it preserved long-standing practice and was justified by EPA’s ability to interpret CWA requirements.  Ultimately, the Second Circuit deferred to EPA and allowed the rule to stand.  In turn, the February 26 decision by the Supreme Court allows the Second Circuit decision to stand, thereby affirming the validity of the Water Transfers Rule.  The case was widely seen as a test for Justice Neil Gorsuch, who has expressed hostility to the deference doctrine and EPA regulations alike.  By declining to hear the case, the Court has deferred that test for another day.

Who’s in Charge?

Under a process known as “delegation,” states may assume permitting and other authority under the CWA.  To-date, 46 states have received such delegation from EPA, and all but Massachusetts, New Hampshire, Idaho, and New Mexico now administer their own NPDES permitting programs.  In the absence of delegation, EPA manages the Clean Water Act and NPDES program in those four states, which often overlap and may duplicate separate state law requirements.

New Hampshire is currently evaluating whether to seek CWA delegation from EPA, and has established a legislative commission to explore its options.  And as we have previously reported, Massachusetts has explored CWA delegation in the past, but those efforts largely fizzled out.  But both of these efforts may have new life: the EPA, under Administrator Pruitt, is very focused on “cooperative federalism” and with EPA seeking to slash its budgets, CWA delegation is likely on EPA’s radar as an action item over the next several years.  And, in late 2017, MassDEP Commissioner Martin Suuberg expressed strong support for CWA delegation, as has Governor Baker.  Whether delegation will become a reality for Massachusetts or New Hampshire is anyone’s guess, but regardless of the outcome 2018 is shaping up to be an interesting year for water law.

 

© 2018 Beveridge & Diamond PC
This post was written by Brook J. Detterman of Beveridge & Diamond PC.

More industry groups petition Department of Defense to withdraw MLA interpretation on GAP insurance financing—is a response coming?

We previously reported that several trade groups had sent letters petitioning the Department of Defense (DoD) to rescind or withdraw Question and Answer #2 (Q&A 2) from its 2016 interpretative rule for the Military Lending Act (MLA) final rule and itsDecember 2017 amendments. Q&A 2 generated much uncertainty regarding application of the MLA’s exemption for purchase money transactions that also finance the purchase of GAP insurance.

In addition to the letters mentioned in our earlier post, the American Bankers Association (ABA) submitted a similar petition to DOD, and the National Automotive Dealers Association (NADA) and the American Financial Services Association (AFSA) likewise sent a joint letter to DoD requesting withdrawal of Q&A 2.

Both letters highlight a key concern that has arisen in light of  Q&A 2: that MLA–covered borrowers and their families are likely to have diminished access to GAP insurance as a result of Dodd’s guidance. The NADA/AFSA petition describes Q&A 2 as “drying up the availability of these products to covered members (and in some cases all consumers) overnight,” with association members “seeking to structure their transactions so as not to trigger application of the statute in the first instance by staying within DOD’s newly constricted motor vehicle financing exclusion.” The ABA letter also states that, “the new interpretation in the amendments has created uncertainty and confusion in the market and potential substantial liability for automobile dealers and lenders who in good faith relied on the plain language of the statute and regulation,” noting that because the December 2017 amendments appear to be retroactive, “vehicle financing loans made after the MLA Regulation effective date of October 3, 2016 may be void and subject to significant penalties and attorneys’ fees.”

It seems these petitions may be achieving their desired effect. We are hearing murmurings that DoD intends to rescind its prior guidance. At least one other blog has made a similar observation,  and our understanding is that the interpretation could be withdrawn as soon as May of this year. If these predictions prove true, it would be a welcome development.

Copyright © by Ballard Spahr LLP
This article was written by Jeremy C. Sairsingh of Ballard Spahr LLP

What US-Based Companies Need to Know About the GDPR, And Why Now?

If you are a US-based or multinational company, you may have noticed that in the past few months you have started to see a significant increase in the number of vendor (or other) agreements that you have been asked to modify or verification forms that you have been asked to execute. If you have not yet, you probably will. The reason for this uptick is simple, the European Union (EU) General Data Protection Regulation (GDPR) goes into effect on May 25, 2018, and companies you work with must be GDPR compliant, which, in turn, puts obligations on you.

The Reach of the GDPR

If you have nothing to do with the EU, i.e., no physical presence in the EU, no employees, no nothing, you are probably wondering why the GDPR impacts you at all. The answer to that comes down to how far the GDPR reaches, which includes its application to US-based companies and what that means for those companies. While the GDPR is the most significant change to European data privacy and security in over 20 years, it is also the most significant change to US data privacy security since HIPAA (impacting the healthcare industry) as many US-based companies will fall within the GDPR’s reach, one way or another.

The GDPR reaches into US-based companies because the GDPR is designed to protect the “personal data” of individuals. Despite what you might have read in others sources, the GDPR does not say EU “residents” or EU “citizens,” it says it applies to the processing of “personal data or data subjects” by controllers and processors who are in the EU. It also applies to “processing activities” related to: (1) offering goods or services; or (b) monitoring data subject behavior that takes place in the EU. See GDPR Article 3(2).

The GDPR replaces the 1995 EU Data Protection Directive which generally did not regulate businesses based outside the EU. However, now even if a US-based business has no employees or offices within the boundaries of the EU, the GDPR may still apply.

Privacy and Personal Data: EU v. US

Stepping back for a second to understand the GDPR, it is important to understand that most of the world views privacy very differently than the US. Where many Americans put a lot of their personal information online via social media right down to what they ate for breakfast, privacy is a very tightly-held right in other parts of the globe, and the definition of privacy is far more robust.

For example, where “personal data” is typically defined by US breach notification laws as an individual’s name accompanied by some other type of identifying information, such as a social security number or financial account information, “personal data” under the GDPR goes much further and includes, “information related to an identified or identifiable natural person.” This means that, if you can use any piece of information to learn or otherwise identify a natural person, the information is “personal data” under the GDPR, and the processing of that data is protected by the GDPR. This type of information includes an individual’s name, ID number, location data, online identifier or other factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that person. It also includes, religion, trade union association, ethnicity, marital status, IP addresses, cookie strings, social media posts, online contacts, and mobile device IDs.

Am I a “Controller” or a “Processor”…or both?

This leads to the next set of logical questions: (1) what is processing of personal information? And (2) what is a “controller” and a “processor”?

The concepts of “controller”, “processor” and “processing of personal data” are part of the new lexicon that US-based companies falling under the GDPR are going to have to get familiar with because they are not terms that have much impact in the US, until now.

Simply put, “processing” personal data is basically collecting, recording, gathering, organizing, storing, altering, retrieving, using, disclosing, or otherwise making available personal data by electronic means. A “controller” is the entity that determines what to do with the personal data. Take for example, a company collects personal information from its customers in order to sell them products. In turn, the company provides that data to its shipping vendors and payment vendors to ship the products to the customers and to bill and collect payment from the customers. The company/seller is the controller, and the shipping company and the payment company are processors.

With this example, the scope of the GDPR to US-based companies also becomes a little clearer as you can start to see where US-based companies would fall somewhere in that controller → processor chain as far as they are selling to customers located in the EU.

The GDPR even applies if no financial transaction occurs if the US company sells or markets products via the Internet to EU residents and accepts the currency of an EU country, has a domain suffix for an EU country, offers shipping services to an EU country, provides translation in the language of an EU country, markets in the language of an EU country, etc.

The GDPR also applies to employee/HR data to the extent the individual employee is a data subject with rights in the EU.

As such, US-based companies with no physical presence in the EU, but in industries such as e-commerce, logistics, software services, travel and hospitality with business in the EU, etc., and/or with employees working or residing in the EU should be well in the process of ensuring they are GDPR compliant as should US-based companies with a strong Internet presence.

Why is this an issue now?

Why this is becoming even more of an issue for US-based companies now is that many companies that are required to be GDPR compliant have obligations that require them to take certain steps with their vendors. As such, many US-based companies that otherwise might not have any GDPR-compliance obligations are finding themselves Googling “GDPR” because they received an updated vendor contract that includes GDPR language or a verification request with similar references.

US-based companies should get prepared for these types of contract modification negotiations and verification requests and be ready to speak on the issues at hand; know what they are signing; know what they are agreeing to; know what they should not be agreeing to; know that they are in required compliance or will be in compliance by May 25, 2018; and know what the penalties are if they do not.

The fines and penalties are significant and many US-based companies will likely fall into the categories of controller and processor. While the GDPR provides for certain liability for each of those roles, some liability can be transferred by contract so contract review and GDPR understanding is critically important.

At a minimum, what should I know?

At a bare minimum, you should understand that if a company you work with is asking you to revise an agreement, sign off on a verification, or something similar, it might be related to their obligations under the GDPR and, in turn, yours.

One of the keys to the GDPR is that data subjects must be fully informed about what is happening to their data, why it is being collected, how it will be used, who will be processing it, where will it be transferred, how they can erase it, how they can protect it, how they can stop its processing, etc. The bulk of the consent and notification responsibility falls on the controller, but the processor and the controller have to work together to ensure the data subject’s rights are protected and this will happen in two separate but distinct steps:

The first step is in the overall physical compliance process, which takes the most time as it requires reviewing data collection and processing; ensuring there is a legal right to have the data and process it; gaining a fundamental understanding of what is going on with the data and where it is going; building security protocols around the data; etc.

Controllers

Controllers specifically must, at a minimum:

  1. Review data processing activities and conduct an Impact Assessment.

  2. Identify their data processing activities for which it is a controller and ensure it understands its responsibilities.

  3. Ensure that, in respect of each processing activity for which it is a controller, it has implemented appropriate technical and organizational measures to ensure compliance with the GDPR; and ensure it has appropriate processes and templates in place for identifying, reviewing and (and to the extent required) promptly reporting data breaches.

Processors

Processors must, at a minimum:

  1. Review all data processing activities.

  2. Ensure there is a lawful basis for each processing activity (or that there is consent or that an exemption or derogation applies).

  3. Where consent is the basis for processing, review existing mechanisms for obtaining consent, to ensure they meet GDPR.

  4. Where a legitimate interest is the basis for processing, maintain records of the organization’s assessment of that legitimate interest, to show the organization properly considered the rights of the data subjects.

  5. Update privacy policies.

  6. Train employees who process personal data to quickly recognize and appropriately respond to requests from data subjects to exercise their rights.

The second step is in contracting between the controller and processor to ensure their contracts meet all the legal specifications of the GDPR. The GDPR outlines a number of contractual requirements between controllers and processors including: identifying the subject matter and duration of the processing; identifying the nature and purpose of the processing; structuring the obligations and rights of the controller; acting only upon the written instructions of the controller; ensuring those processing data are doing it under written confidentiality agreement; assist the controller in meeting breach notification requirements.

Unlike US breach notification laws that allow more time to notify the appropriate individuals and authorities of a data breach, the GDPR requires notification be made within 72 hours of a breach.

There is a lot to take in and think about when it comes to the GDPR. This is a law that we have been reviewing, analyzing, and working with for almost two years. The hardest thing about the GDPR is changing your perspective and realizing it probably does have some applicability to your business; changing your lexicon to include words like “controller”, “processor”, and “data subject”; and learning to break the GDPR down to its manageable chunks so compliance stops being overwhelming and starts getting done, piece by piece.

© Copyright 2018 Dickinson Wright PLLC
This article was written by Sara H. Jodka of Dickinson Wright PLLC

Tribal Sovereign Immunity Does Not Apply to IPR

In a matter of first impression, the Patent and Trial Appeal Board (PTAB) denied a Native American tribe’s motion to terminate a finding that tribal sovereign immunity does not apply to inter partesreview (IPR) proceedings. Mylan Pharmaceuticals Inc. v. St. Regis Mohawk Tribe, Case No. 2016-01127, Paper No. 14 (PTAB, Feb. 23, 2018) (per curiam).

Based on petitions filed by Mylan, the PTAB instituted IPR proceedings on patents related to the drug Restasis. At the time of institution, the owner of the challenged patents was Allergen, Inc. Less than one week before the scheduled final hearing, Allergen assigned the challenged patents to the Saint Regis Mohawk Tribe. On that same day, the Tribe granted back to Allergen an irrevocable, perpetual, transferable and exclusive license under the challenged patents for all US Food and Drug Administration-approved uses in the United States. Allergen was also granted the first right to sue for infringement with respect to “generic equivalents,” while the Tribe retained the first right to sue for infringement of anything unrelated to generic equivalents. As the new owner of the challenged patents, the Tribe filed a motion to terminate the IPR proceedings for lack of jurisdiction based on tribal sovereign immunity.

The PTAB denied the motion to terminate, finding that tribal sovereign immunity does not apply to IPR proceedings. The PTAB found that while state sovereign immunity has been applied in IPR proceedings, the immunity possessed by Native American tribes is not co-extensive with that of the states. The PTAB explained that IPRs are not the type of suit to which a Native American tribe would traditionally enjoy immunity under common law. The PTAB also noted that Congress enacted a generally applicable statute that renders any patent (regardless of ownership) subject to IPR proceedings, and that the PTAB does not exercise jurisdiction over the patent owner, but instead exercises jurisdiction over patents in order correct its own errors in originally issuing the patents.

The PTAB held that even if the Tribe was entitled to assert immunity, the IPR proceedings could continue with Allergen as the patent owner. The PTAB found that the license agreement transferred “all substantial rights” in the challenged patents back to Allergen. The PTAB found that Allergen was granted primary control over commercially relevant infringement proceeding and the Tribe was granted only an illusory right to enforce the challenged patents. The PTAB also found that the license agreement provided Allergen with all rights to meaningful commercial activities under the challenged patents, rights to sublicense, reversionary rights in the patents, obligations to pay maintenance fees and control prosecution, and the rights to assign interests in the patents. Finally, the PTAB found that the Tribe was not an indispensable party and would not be significantly prejudiced if it chose not to participate in the IPR proceedings since Allergen could adequately represent the Tribe’s interest of defending the challenged patent’s validity.

Practice Note: Allergan and the Saint Regis Mohawk Tribe have filed a Notice of Appeal to the US Court of Appeals for the Federal Circuit on several issues, including whether tribal sovereign immunity applies to IPR proceedings.

© 2018 McDermott Will & Emery
This article was written by Amol Parikh of McDermott Will & Emery

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