The National Law Forum

“Hello, Newman" Government Continues to Litigate Reversed Insider Trading Convictions

The U.S. Attorney for the Southern District of New York, Preet Bharara, has decided not to go down without a fight. Following a Second Circuit panel’s reversal of Bharara’s signature achievement, the insider-trading convictions of former hedge fund managers Todd Newman and Anthony Chiasson, the U.S. Attorney’s office has petitioned the court for rehearing and rehearing en banc. The Securities and Exchange Commission has also weighed in on the U.S. Attorney’s side, arguing in an amicus brief that the panel seriously erred in its decision. Meanwhile, in other cases, particularly outside the Second Circuit, the Justice Department, and the SEC have argued strenuously that the Second Circuit’s panel decision should not be followed.

In the Second Circuit, the battle lines are being drawn. Bharara’s office has asked both the panel and the full Second Circuit to rehear the case. The US Attorney’s office has argued that the panel erred by imposing two requirements that are purportedly contrary to law– first, that a tipper act for a “personal benefit” of financial consideration, or something at least akin to monetary gain; and second, that the tippee know that the tipper supplying the inside information acted for such a benefit. The SEC has concurred with this assessment, elaborating on Newman’s conclusion that evidence of friendship between tipper and tippee is insufficient to prove the “personal benefit” necessary for tipping liability. The Commission contends that this contradicts Dirks v. SEC, the Supreme Court’s seminal insider trading decision. Both the U.S. Attorney and the SEC contend that, if Newmanremains the law, it will seriously threaten the integrity of the securities markets, and government regulators will be dramatically limited in their ability to prosecute “some of the most common, culpable, and market-threatening forms of insider trading.”

In opposition, Newman and Chiasson, along with various law professors, the criminal defense bar, and even Marc Cuban, have argued that the Second Circuit panel got it right when it imposed an important, objective outer bound to an otherwise amorphous illegal activity. The defendants even engaged in ad hominem criticism of Bharara, analogizing him to a “Chicken Little” complaining that the sky is falling, or more precisely, a “petulant rooster whose dominion has been disturbed.” Those supporting the opinion assert that any perceived difficulty created by the decision can, and should, be rectified by Congress.

Even as the Newman case continues forward, its repercussions are being felt within the Second Circuit and beyond. In the Southern District alone, at least a dozen defendants, who were convicted or pleaded guilty underpre-Newman law, have argued that their cases need to be revisited in light of Newman. No court yet has agreed with that argument, but most of these motions remain pending.

Outside the Second Circuit, the Government is looking to ring-fence the Newman decision and limit its applicability elsewhere. Federal prosecutors, for example in North Carolina, have argued that Newman is not the law in the Fourth Circuit and therefore should not be followed. Meanwhile, defendants in other jurisdictions are invokingNewman in pending, and even resolved, insider trading matters, both civil and criminal.

Defendants are even arguing Newman’s applicability within the SEC’s administrative courts – with success. In In re Peixoto, an SEC administrative proceeding related to Herbalife, the Commission voluntarily dropped its case against Peixoto after Newman. Other cases in the agency’s courts (including against SAC founder Steven Cohen) remain on holding pending final resolution of Newman. And in In re Ruggieri, the administrative law judge said that he would require the SEC to demonstrate the Newman standard of “personal benefit.”

Clearly, the Newman saga has not reached its conclusion, but the fall-out already demonstrates what a momentous decision the Second Circuit panel made.

ARTICLE BY

Brian E. Casey

Barnes & Thornburg LLP

French Supreme Court Specifies Requirements for Health Care Companies Under the Sunshine Act

Law no. 2011-2012 of 29 December 2011, also known as the French Sunshine Act, introduced into French law disclosure obligations imposed on health care companies (HCC). The French Medical Board and a nonprofit organisation challenged the law’s implementing decree of 21 May 2013 and its explanatory circular of 29 May 2013. On 24 February 2015, the Conseil d’Etat annulled some of the challenged provisions of the aforementioned decree and circular, and provided useful clarifications on the scope of the disclosure obligations.

Pursuant to the decree of 21 May 2013 and the explanatory circular of 29 May 2013, there were three exceptions to the obligation to disclose (i) benefits in kind or cash exceeding EUR10 and (ii) written agreements:

Payments made as reasonable compensation for services rendered and for salaries did not have to be disclosed.
Companies that manufacture or commercialise cosmetic and tattoo products did not have to disclose agreements other than those relating to the conduct of health and safety work assessments and biomedical or observation research on these products.
Companies that manufacture or commercialise health products did not have to disclose commercial sales agreements of goods and services.

Under the Conseil d’Etat decision of 24 February 2015, the two first exceptions no longer apply, and the scope of the third exception has been specified. The three main changes entailed by this decision are described herein.

All payments made from 1 January 2012 by HCCs to HCPs that do not constitute salaries must be disclosed.

The Conseil d’Etat specified the limits of the concept of “benefit in cash or in kind” that must be disclosed. The 2013 explanatory circular had given a narrow definition of this concept, stating that it excluded payment made as reasonable compensation for services rendered and for salaries.

According to the Conseil d’Etat, however, the provisions of Law no 2011-2012 exclude only salaries received by health care professionals (HCPs) working exclusively as employees of HCCs. According to the words of the General Advocate (Rapporteur Public) before the Conseil d’Etat, the exclusion relates to an “HCP who works exclusively as an employee in a HCC.”

Consequently, the Conseil d’Etat annulled the provisions of the explanatory circular which disregarded both Law no. 2011-2012 and the decree of 21 May 2013 by excluding from the scope of the disclosure obligations payment made as reasonable compensation for services rendered.

Companies manufacturing or distributing non-corrective contact lenses, cosmetic or tattoo products must disclose all agreements concluded with French HCPs, regardless of the object of the agreement.

With regard to companies manufacturing or distributing non-corrective contact lenses, cosmetic or tattoo products, the decree limited the scope of the disclosure obligations to agreements concluded with HCPs relating to the conduct of health and safety work assessments and biomedical or observation research on the products.

The Conseil d’Etat stated that by limiting the scope of the disclosure obligations, the decree disregarded the provisions of Law no. 2011-2012, and therefore annulled the regulatory provisions at stake.

The only commercial sales agreements of goods and services that are excluded from the disclosure obligations are those in which the HCP is the buyer.

The Conseil d’Etat clarified the content of Article R. 1453-2 of the French Code of Public Health, which excluded from the disclosure obligations commercial sales agreements of goods and services. Even though this article was explained in the circular, it remained unclear which agreements it really targeted.

According to the judges, this exemption concerns solely commercial sales agreements of goods and services in which the HCP is the buyer. Furthermore, despite the rather unclear wording of Conseil’s decision, it must be noted that, in light of the words of the General Advocate, the decision clarified that this exemption does not apply to purchase of advertising space by HCCs in medical journals.

Conclusions

Since the Conseil d’Etat did not time-differentiate the effects of its decision, its 24 February 2015 interpretation of the Sunshine Act is deemed to apply to all conventions concluded and benefits paid from 1 January 2012. Therefore, HCCs should now disclose the following:

All payments made from 1 January 2012 by HCCs to HCPs for services rendered that do not constitute salaries
All agreements concluded from 1 January 2012 between companies manufacturing or distributing non-corrective contact lenses, cosmetic or tattoo products and French HCPs
Commercial sales agreements of goods and services in which the HCP is not the buyer

In accordance with the principle of legal certainty, HCCs should be given reasonable and sufficient time to adapt to the regulation as interpreted by the Conseil d’Etat, during which period of time they should not be sanctioned.

ARTICLE BY

Charlotte Michellet

Sabine Naugès

McDermott Will & Emery

FAA Issues New Proposed Rules for Unmanned Aerial Systems (Drones)

The FAA Modernization and Reform Act of 2012 addressed the integration of civil unmanned aircraft systems, also known as UAS or drones, into the national airspace system. The Act requires the Secretary of Transportation to develop, among other things, a comprehensive integration plan and rules governing the operation of small UAS. On Feb. 15, 2015, the Federal Aviation Administration (FAA) issued its proposed rules. According to the Secretary of Transportation, UAS “technology is advancing at an unprecedented pace and this milestone allows federal regulations and the use of our national airspace to evolve to safely accommodate innovation.”

The Notice of Proposed Rulemaking will be available for public comment for 60 days following its publication in the Federal Register. Interested and affected companies have the opportunity to provide comments on the FAA proposal and shape the final UAS rule.

Permitted Vehicles

The proposed rules would permit the operation of UAS weighing less than 55 pounds. The UAS would not be required to have an airworthiness certificate, such as that required for an airplane, but they would have to display aircraft markings similar to other aircraft, and operators would be required to conduct a pre-flight safety check. The FAA is also soliciting public comment on further exemptions for “micro” UAS, weighing 4.4 pounds or less. The proposed rules do not apply to model aircraft and do not apply to private, recreational use of drones.

Operational Limits

The UAS could operate at speeds up to 100 mph, and at altitudes below 500 feet above ground level. Operations would be limited to daylight hours with visibility of at least 3 miles. The UAS would have to remain within the unaided visual line-of-sight of the operator; binoculars or an onboard camera would not satisfy this requirement. Operators could also use an observer to assist in maintaining visual contact, but would have to retain the ability to see the UAS themselves.

Licensed Operators

Operators would have to be licensed by the FAA, but they would not need a pilot’s license. Under existing regulations, operators can request an exemption from FAA regulations, but such exemptions are usually conditioned on possession of a pilot’s license by the operator. Under the proposed rules, operators would have to be at least 17 years old and be vetted by the Transportation Security Administration. They would be required to pass an initial aeronautical test at an FAA test site, with an update test every 2 years. The anticipated costs for the license are small, in the range of a few hundred dollars.

Flights over People and Property

The UAS would be prohibited from operating over any persons “not directly participating in the operation” or “not located under a covered structure that can provide reasonable protection.” This is a significant limitation, which would preclude flights over most public locations such as schools, beaches and parks, and might be read to limit flights over residential areas. Given the number of drone videos already posted online, this rule is likely to be broken, which, as noted below, may result in potential liability. The limitation on overflight of other persons also highlights privacy concerns. Although not directly addressed in the proposed rules, privacy issues will continue to be a point of friction between drone operators and those potentially affected, such as drone-operating photo-journalists and their news subjects.

Delivery Systems and Remote Monitoring

The line-of-sight requirement would likely preclude the type of remotely-piloted delivery systems envisioned by certain major sales and fulfillment services. This requirement may also limit the use of the proposed rules for authorizing remote monitoring of agricultural sites, pipelines and other areas that are out of the line-of-sight of the operator. However, in these situations, the FAA grants limited exemptions to existing FAA regulations for qualified operators, and the proposed rules do not preclude further development of rules for remote operation.

Liability and Insurance

A UAS weighing 50 pounds and traveling at 100 mph could represent a significant potential danger to persons and property. The proposed rules would require a report within 10 days of any accident involving injury to persons or property. Companies operating drones are cautioned that existing liability policies may not provide coverage for drones, particularly for those that are not operated in compliance with existing FAA regulations and exemptions. Some carriers are writing coverage specific to drones, and operators, as well as the companies that hire such operators, should consult with their insurance agents prior to commencing operations.

Ongoing Legal Issues and Interim Operations

The FAA rules are proposed rules, not authorizations for immediate operations. Therefore, companies that plan to use drones before the rules are finalized are cautioned that, unless they hold an existing FAA exemption, they may risk liability for the commercial use of drones. In addition to the FAA, state and local governments are currently exploring further restrictions on drone flights, including restrictions related to privacy, which are not directly addressed in the FAA proposed rules.

In addition to regulatory limitations, drone operations can create significant risks of liability for personal injury, property damage and other claims. These legal issues are likely to present risks even for companies that do not directly operate drones, but instead contract with drone operators.

Given the rapid development in both the technology and the rules and regulations, companies that plan to operate or hire drones should consult with counsel to get an up-to-date assessment of the regulatory environment and other legal risks pertaining to their particular location.

ARTICLE BY

Alais L. M. Griffin

Jordan D. Grotzinger

Adam Siegler

Greenberg Traurig, LLP

The Artist’s Legacy – Gifts of Art to Family and Friends

On January 1, 2015, the gift and estate tax exemption increased to $5.43 million per person and to $10.86 for a married couple. Artists who hope to take advantage of the increased exemption face unique challenges when making gifts to family and friends of visual art they have created. Although specific situations can differ widely, the general principles to consider when making such gifts are described below.

Generally, the donor’s income tax basis carries over to the gift recipient and is increased by any gift tax paid. Because visual art is ordinary income property in the hands of the creator, the donee of a gift of a work of visual art from the creator receives the artist’s income tax basis. The donee will recognize ordinary income if he or she chooses to sell the gifted item, and the proceeds will be subject to tax at the donee’s ordinary income tax rate.

To avoid this result, many artists consider waiting to gift works of visual art they have created until death. The beneficiary of a testamentary gift of visual art from the creator receives the gift with a “stepped-up” basis to the art work’s fair market value on the date of the artist’s death. Additionally, because the beneficiary is not prohibited from holding the work as a capital asset, the beneficiary’s sale of the work of visual art would receive capital gain or loss treatment. Whether the long and short capital term gain tax rates are preferential to the taxpayer’s ordinary income rate will vary. For high income taxpayers, the long-term capital gain tax rate may be lower than the beneficiary’s ordinary income tax rate. Of course, the donee’s basis is less of a consideration if the donee does not intend to sell the work.

An artist may favor making a lifetime gift of visual art if the gift qualifies for the annual gift exclusion ($14,000 in 2015) and thus, would not be subject to gift tax. Further, if the artist has an estate that will be subject to estate tax, there may be advantages to gifting art during the artist’s lifetime so that the value of the visual art (and all post-gift appreciation) is not included in the artist’s estate (and subsequently subject to estate tax).

On the other hand, an artist may opt to delay making gifts until his or her death if the artist wishes to use and enjoy the visual art for the remainder of his or her life. Moreover, there may be limited estate and gift tax advantages to gifting the visual art during the artist’s lifetime if the artist has already used his or her lifetime exemption amount or if the artist’s estate is not expected to be subject to estate tax upon his or her death.

Applicability of the legal principles discussed may differ substantially in individual situations. The information contained herein should not be construed as individual legal advice.

ARTICLE BY

Lauren C. Liebes

Sheppard, Mullin, Richter & Hampton LLP

Energy Storage Conference Offers Lessons Learned and Path Forward

The “Storage Week 2015″ summit held in San Diego, CA this week brought together policymakers, regulators, electric utility executives, system vendors, consultants, and other stakeholders to discuss the remarkable progress made in the last few years to deploy and integrate energy storage technologies. The 8th annual event provided insights and practical advice regarding applications ranging from large-scale, grid-connected energy storage projects, to distribution level and behind-the-meter storage opportunities. Noteworthy from the beginning of the conference was the fact that a significant percentage of the attendees were project developers and financiers which suggests that the energy storage sector is finally moving away from conceptual discussions and into actual deployment.

Much of the discussion at the conference focused on the efforts to integrate energy storage in organized electricity markets from New York to Texas to California. Representatives from ISOs, RTOs, utilities, and project developers provided an overview of the progress that has been made in these parts of the country, lessons learned to date, and insights into the continuing evolution and deployment of energy storage.

Given both the location of the conference and recent regulatory and industry developments, energy storage in California figured prominently in the discussion. California PUC (CPUC) Commissioner Carla Peterman provided the keynote address and discussed the progress made since passage of AB 2514 in 2010 which required the CPUC to adopt energy storage system procurement targets for certain California electric utilities. Comr. Peterman and many other speakers discussed the market dynamics and industry response associated with the CPUC’s 2013 decision requiring the state’s utilities to work toward acquiring 1.325 GW of transmission-connected, distribution-connected, and behind-the-meter energy storage resources. These policy-driven changes have enabled California and its utilities and consumers to begin to develop valuable experience with energy storage technologies, contractual arrangements, and regulatory approaches. Representatives from the CPUC, the California independent system operator (CAISO), utilities, and project developers all emphasized that flexibility is the key at this early stage. Further developments in California will be guided by this experience as well as CAISO’s Energy Storage Roadmap which focuses on increasing revenue opportunities for energy storage, reducing interconnection costs, and streamlining regulatory processes to improve certainty for energy storage providers and users.

Two key themes emerged throughout the various conference presentations and discussions.

First, the success of energy storage will depend largely on the development of regulatory and market approaches that recognize and reward the multiple benefits that energy storage technologies can provide. Energy storage can be both a generation asset and a transmission asset. It can provide grid balancing and stability through power supply management, frequency regulation, and voltage stability. It can provide demand response and load reduction benefits. Regulations should accommodate the multi-purpose nature of energy storage. As one speaker commented, “Regulation should not stand in the way of innovation.”

Second, technology and industry developments will continue to create new opportunities for energy storage. Declining prices for both renewable energy and energy storage technologies, a changing generation mix due to coal plant retirements and natural gas-fired replacements, and fundamental changes that are driving the utility-customer relationship from the provision of a commodity (i.e., kWh) to the complex, interactive “internet of energy” — these and numerous other factors align well with the multiple roles energy storage can play.

With few exceptions, there was little discussion of the role of and opportunities for energy storage outside of organized markets, particularly in the western United States outside of CAISO. While the dynamics of organized markets don’t exist in many western states, many of the same operational realities do. For example, western utilities struggle with the same challenges associated with integrating renewable resources and the now famous (or infamous) “duck curve” – two challenges well-suited for energy storage solutions.

This raises the question, “What is the future of energy storage in the western U.S. outside of organized markets?” Will the traditionally fiercely independent West chart its own, unique course for energy storage on a state-by-state basis? Will western states pursue some form of regional cooperation that facilitates deployment of energy storage? Or will energy storage continue to evolve in these states on a voluntary, utility-by-utility basis as it essentially has to date? Whichever course is followed, western states and utilities can take advantage of the learning curve and experiences gained by their colleagues in the organized markets to determine what approach to energy storage will work best for the west and its wide-open spaces.

ARTICLE BY

Thomas J. Dougherty

Lewis Roca Rothgerber LLP

Zombie Properties May Haunt Lenders in Wisconsin Foreclosures

A recent Wisconsin Supreme Court case holds that a foreclosure court can require a foreclosing lender to sell an abandoned or “zombie” property at a sheriff’s sale within a court-determined reasonable time after the expiration of the 5-week redemption period applicable in such cases.

In The Bank of New York v. Carson, the lender foreclosed on Carson’s residence in the City of Milwaukee. More than 16 months after the judgment of foreclosure was entered, the lender still had not sold the property through a sheriff’s sale. Carson filed a motion to amend the judgment to include a specific finding under § 846.102(2) that the property was abandoned, and asked that the lender be ordered to sell the property promptly after the expiration of 5 weeks from entry of the amended judgment. The circuit court concluded that it lacked authority to compel a lender to sell an abandoned property and denied the motion.

Carson appealed and the Court of Appeals agreed with Carson, reversing the circuit court and determining that the plain language of the statute “directs the court to ensure that an abandoned property is sold without delay, and it logically follows that if a party to a foreclosure moves the court to order a sale, the court may use its contempt authority to do so.” The lender then appealed to the Wisconsin Supreme Court, arguing that the use of the word “shall” in the statute was “permissive” and not mandatory, and that instead the lender had 5 years to conclude a sheriff’s sale based on a different statute.

The Supreme Court affirmed the Court of Appeals, holding that the trial court has authority to order a lender to sell an abandoned property after expiration of the redemption period because § 846.102(1) states that:

the sale of such mortgaged premises shall be made upon the expiration of 5 weeks from the date when such judgment is entered.

Carson also holds that the trial court can require a lender to sell the abandoned property within a “reasonable” time after the expiration of the redemption period, but does not provide any criteria for determining what a reasonable time is. The decision discussed the challenges posed by abandoned properties and reasoned that the legislature intended a prompt sale of abandoned properties to address such problems.

Carson contrasts with another recent Court of Appeals case not involving an abandoned property, but also involving whether a foreclosing lender can be required to sell a foreclosed property upon the expiration of the applicable redemption period. In the consolidated case of Bank of America, N.A. v. Prissel and Bank of America, N.A. v. Gerlach (“Gerlach”) the lender elected to waive its right to a deficiency judgment thereby shortening the residential redemption period from 12 to 6 months. The lender did not promptly proceed with sheriff’s sales and the borrowers then moved to vacate the foreclosure judgments on the grounds that since the lender did not publish notice of the sales prior to the expiration of the redemption period, valid sales could not be conducted without such publication and therefore the foreclosure judgments could not be satisfied. This argument was based on subsection (2) of § 846.101 which provides that:

the sale of such mortgaged premises shall be made upon the expiration of 6 months from the date when such judgment is entered.

and that

[n]otice of the time and place of sale shall be given… within such 6-month period…

The Gerlach court affirmed the circuit court’s decision denying the motions, holding that the use of the word “shall” in § 846.101(2) is “directory” and not mandatory. In other words, the statute allowed for the publication of the sale notice prior to the expiration of the redemption period to ensure that a sale can occur immediately upon the expiration of the period, but did not require such publication. A lender’s decision not to so publish is not fatal to its ability to publish and direct the sheriff to conduct a sale at a later date.

The Gerlach court noted that the borrowers were in no worse a position due to the lender’s decision not to sell the properties. The Gerlach decision also opined that in a hypothetical situation a borrower would benefit from a lender’s decision against immediately publishing a sale notice (a prerequisite to a Sheriff’s sale) by continuing to occupy a home without having to pay the mortgage and knowing (in these cases) there was no liability for any deficiency. Such extra time would also afford the borrower an opportunity to redeem or work out a loan modification with the lender.

Are Carson and Gerlach Contradictory?

Carson and Gerlach both involved appellate court interpretation of the word “shall” in the applicable statute governing the deficiency election and applicable redemption period, and each addressed the issue of whether a lender can be compelled to sell a property after the redemption period. However, the cases are differentiated by the nature of the property being foreclosed; Carson involved an abandoned home and Gerlach did not. In fact, theCarson decision (from the Supreme Court, and decided after Gerlach) was careful to limit its holding to abandoned homes. Therefore, the holdings are not contradictory.

Practical Implications of the Decisions

Although Carson permits a circuit court to require a lender to sell an abandoned property within a reasonable time after the redemption period expires, the case does not require the lender to buy the property. Foreclosing lenders are often the first and only bidders for their collateral at sheriffs’ sales, but there is no law requiring the lender to bid. However, if the lender does not bid, anybody else (including the owner) could attend the sale and win the bidding for the property with a very small bid. If that did not happen and there are no bids at the sale, further court involvement may be necessary to address the limbo status of the unsold abandoned property. This would lead to further delay in the ultimate disposition of the zombie property, which Carson was trying to avoid.

Other takeaways for lenders from Carson are:

Lenders should recognize before starting a foreclosure if they may be dealing with an abandoned property. The statutory criteria that will evidence abandonment include:
- Boarded, closed, or damaged windows or doors.
- Missing, unhinged, or continuously unlocked doors.
- Terminated utility accounts.
- Accumulation of trash or debris.
- Reports to law enforcement officials of trespassing, vandalism, or other illegal acts.
- Conditions that make the premises unsafe or unsanitary.
If some or all of those factors are present in the lender’s pre-foreclosure due diligence, an early informed decision should be made as to whether the lender really wants to own the property through foreclosure.
Some municipalities (notably the City of Milwaukee) have ordinances that put registration and maintenance obligations on the lender after just starting a foreclosure action, which should also be considered prior to filing.
Lenders should consider just suing the borrower on the note and not foreclosing on the property if there is a risk that it is abandoned and the lender does not want to own the property or let it be sold at a sheriff’s sale for a minimal amount. More money judgments against borrowers who abandon their properties may be an unintended consequence of Carson because in a foreclosure on residential property, the deficiency is usually waived.
If the facts permit, lenders should seek a finding in the foreclosure judgment (a final judgment for purposes of appeal) that the property is not abandoned, thereby increasing the procedural burden on the borrower to seek a different finding post-judgment.

Carson should encourage lenders to make an earlier decision as to whether they really want to own an abandoned property at the end of the foreclosure process. If not, then the lender still has the option to just sue on the note.

Gerlach confirms the current practice as to properties that are not abandoned, so its impact may be minimal. Borrowers frequently lack creditworthiness for post-foreclosure refinancing or modification of their mortgage loans, and therefore there is generally little incentive for lenders to delay a sheriff’s sale of unabandoned foreclosed property after the expiration of the redemption period to allow additional time for such negotiations. As a result, the perceived benefit of additional time being afforded to borrowers by not compelling a sale at the conclusion of the redemption period (which is the holding in Gerlach) may be limited.

New Pennsylvania Department of Environmental Protection Well Transfer and Status Change Procedures Detailed

The Pennsylvania Department of Environmental Protection has developed new instructions for handling oil and gas well transfers and status and ownership changes. DEP is asking operators that as they update their well inventories that they be aware of these requirements when they submit information back to the appropriate DEP district office. The instructions summarized here are in a Power Point presentation distributed by the DEP’s Seth Pelepko and readers are advised to contact Seth directly for a copy of his detailed presentation.

The presentation lists four areas of focus. They are:

1) Well Transfers;

2) Well Status Changes;

3) Well Type Changes and

4) All Other Changes.

Well transfer details consume the largest portion of the presentation. Here operators are directed to complete the DEP’s Application for Transfer of Well Permit (5500-PM-OG0010) and to use the presentation’s checklist to ensure all necessary information is included. The checklist identifies the 7 steps operators must complete in addition to a permit holder resolution document. It is noted that the Department has 45 days from the date of receipt to approve or deny the transfer request. Part of this process involves the DEP completing a compliance history analysis of both parties involved in the transfer.

Well status changes require the operator determine the actual status of the well (plugged, inactive, active or never drilled) and to submit the proper documentation to DEP so they can make the necessary changes to their database.

Well types beyond production are storage, injection or observation. Any changes in the type classification must be submitted to the DEP along with the necessary documentation.

ARTICLE BY

Gary E. Slagel

Steptoe & Johnson PLLC

February 2015 State Tax Credit and Incentive Update

This is the second in a monthly series outlining updates in state tax credits and incentives, including legislative, gubernatorial and case law updates. While we recognize that tax credits and incentives are often criticized by some tax policy experts, they are a reality in today’s competitive business environment with states competing with each other for jobs and investment. The good news for both corporate taxpayers and non-profit entities is that state tax credits and incentives are available and can benefit a business in many ways.

Recent Announcements of Credit/Incentives Applications and Packages

Arizona: Just three weeks after Apple Inc. announced plans to invest $2 billion over 10 years to open a data center in Arizona, on February 25, 2015, the Arizona Legislature passed a bill (HB 2670) that would grant millions of dollars in business tax incentives to Apple. Under the bill, international operations centers, such as the 1.3-million-square-foot digital command center Apple plans to build in Mesa, would be eligible for a renewable energy tax credit worth up to $5 million. The credit could be used for up to five years. HB 2670 would also exempt international operations centers from the transaction privilege tax, an annual tax break of $1.2 million, according to the bill.

A company would be required to make a total of $1.25 billion in capital investments over 10 years, including the cost of land, buildings, and equipment. The company would also be required to invest at least $100 million in one or more renewable energy facilities over a three-year period. A company that fails to make at least $100 million in capital investments each year could remain eligible for the tax incentives by paying to the Department of Revenue the amount of utility relief the company would have otherwise been granted for that tax year.

California: In February 2015, the California Governor’s Office of Business and Economic Development (GO-Biz) announced that it has received 253 applications with a combined tax credit amount of $289 million for the third California Competes Tax Credit Application period, which closed February 2, 2015. The pool of credits available is $75 million and is expected to be awarded on April 16, 2015. In the first two application periods, 400 companies asked for $500 million in credits from a pool of $29 million awarded to 29 companies in June 2014, and 286 companies asked for $329 million from a pool of $31 million awarded to 56 companies in January 2015. A total of $151.1 million is available in the 2014-15 fiscal year, with one more round of applications and award of the final $31.1 million scheduled for June 18. In the next fiscal year, $200 million will be available for the credit.

New Jersey: A New York apparel company is moving from New York City to Jersey City. The retailer, Charles Komar & Sons Inc., will be moving its headquarters and 500 employees to Jersey City. In return, the state will be providing a $37.2 million tax break, including negotiated incentives.

Legislative, Regulative and Gubernatorial Update

California: On February 25, 2015, the California Legislative Analyst’s Office presented state lawmakers with options for a state earned income tax credit (“ETIC:”), including a “piggyback” on the federal EITC, a state match for the federal EITC for low-income working families, and a supplement to the federal EITC for childless adults.

Permanent regulations governing the California Competes Tax Credit program took effect February 5, 2015, to replace temporary regulations adopted Feb. 20, 2014. The final version of the regulations makes a few minor changes from the temporary regulations. One of the changes specifies that companies can apply for and win the credit multiple times, but each time they will be evaluated based on new commitments for investment and pay to workers in California. The final regulations also require applicants to assert that absent the credit award they “may” terminate or relocate employees, rather than “will” terminate or relocate.

The Franchise Tax Board (“FTB”) must review the books and records of all businesses receiving the credit that have more than $2 million in annual gross receipts to determine if they have met the milestones for employment, wages and investment required under their contracts with the state. If the FTB determines that a business has a material breach of its contract, either through failure to timely provide information for review, a material omission or incorrect information, or failure to meet milestones for employment, wages or investment, the agency will notify GO-Biz. It will be up to the five-member GO-Biz California Competes Tax Credit Committee to make a final decision whether businesses must pay back the credit due to a breach.

On February 12, 2015, the California Film Commission released draft emergency regulations to implement the state’s film and television tax credit program newly expanded under 2-14 AB 1839, which increased funding to $300 million per fiscal year, expanded eligibility, and eliminated budget caps for independent films and the state’s lottery system. The draft now goes to the governor’s Office of Administrative Law for review and final approval. The draft document is posted on the Film Commission’s website under “News & Notices.”

In related news, California will hold a final lottery under the old program on April 1. The new incentives plan will allot funds based on how many jobs productions employ, among other criteria, such as the use of California visual effects companies and production facilities.

For the first time, the program allows all new TV shows to qualify – not just on basic cable like under the current plan – as well as movies with budgets above $75 million. However, the up-to-25% credit applies only to the first $100 million of a movie’s costs, and that may cool the enthusiasm of studios when planning shoots on big budget projects. Despite the improvements, California’s incentive plan is smaller than some rival states with whom they are fighting for a slice of the production pie.

Illinois: On February 13, 2015, SB 707 was introduced which would entitle interactive digital media companies to an income tax credit in an amount of 30% of expenses incurred for an accredited production in a taxable year. The credit would be able to be carried forward or transferred.

Louisiana: On February 27, 2015, Louisiana Gov. Bobby Jindal proposed to change some of the state’s individual and business tax credits from refundable to nonrefundable, which according to his fiscal 2016 executive budget proposal would save the state $526 million. Refundable credits which would be affected include, but are limited to, inventory tax credit, research and development credit, angel investor credit and historical rehabilitation residential credit.

Louisiana: Louisiana lawmakers on February 24, 2015, released draft bills that would scale back the state’s generous film tax credit by setting clear limits on the program and making related costs to the state more predictable. Currently, the credit may be used to offset personal or corporate income tax liability in the state. The program provides a transferable tax credit of up to 35 percent of total in-state expenditures with no cap and requires a minimum of $300,000 in spending. The credit can be transferred to Louisiana taxpayers or back to the state for 85% of its face value. State Sen. Jean-Paul Morrell’s draft bill would cap the total amount of film credits allowed for one year at $300 million, but what isn’t used in that year could be carried forward to the next. Under Rep. Julie Stokes’ bill, the credit could be transferred only once, and the state’s buyback percentage would be increased from 85 cents to 90 cents on the dollar.

Michigan: In February 2015, Michigan Gov. Rick Snyder delivered his proposed 2016 budget, offered a projected budget for fiscal 2017, and signed an executive order to reduce expenditures in the fiscal 2015 budget to account for what the Governor stated is a revenue shortfall that has resulted from businesses claiming tax credits granted during the last decade.

Furthermore, the Governor indicated that he wants to renegotiate the tax incentive agreements the state has with 240 companies. It turns out the state owes about $9.4 billion in tax credits to companies that created jobs in Michigan. That liability costs the state about $500 million a year, a cost that will continue until 2029. The tax credits reduce a company’s liability under the Michigan Business Tax (MBT). The Governor’s administration wants to negotiate with the companies the timing of the credits’ use because currently the companies can claim the credits whenever they want. Of those companies owed the MBT tax credits, Chrysler, General Motors, and Ford alone are owed about half of the balance (over $4 billion) in MBT credits.

Texas: On January 30, 2015, the Texas Comptroller of Public Accounts proposed regulations (Prop. Tex. Admin. Code §3.599) aimed at implementing the state’s Research and Development Activities Credit, which can be applied against a taxpayer’s franchise tax. The proposed rule implements H.B. 800, which was enacted in 2013 and creates a credit for certain expenses from research and development activities. The proposed rule applies to franchise tax reports originally due on or after Jan. 1, 2014, and expires on Dec. 31, 2026. Unused credits may be carried forward for no more than 20 consecutive reports. The total credit claimed for a report, including the amount of any carryforward credit, cannot exceed 50% of the amount of franchise tax due for the report before any other applicable tax credits. The proposed rule would prohibit the transfer of credits to another entity unless all of the assets of the taxable entity are conveyed, assigned, or transferred in the same transaction.

Utah: On February 11, 2015, the Utah Governor’s Office of Economic Development proposed to update a refundable economic development tax credit rule to reflect historic practices and provide a more comprehensive outline to the processes and procedures used in administering and awarding the tax incentive. The rule outlines how a tax incentive is granted including the criteria used in screening applicants and how the tax credit is calculated and redeemed. The rule defines key terms, provides for the application process, and provides the factors to be considered in authorizing an economic development tax increment financing (EDTIF) award. The new rule also outlines the application for and verification of information supporting an annual EDTIF payment, and how to request a modification of the EDTIF offer or contract.

Virginia: On February 9, 2015, the Virginia Senate passed legislation (SB 1447) designed to attract investments from companies that used inversions to reduce their federal tax liabilities. If passed by the House of Delegates, SB 1447 would amend the state’s corporate income tax statute to permit a $5 million exemption for companies that used an inversion transaction to lower their U.S. tax liability and that make a capital investment of at least $5 million in Virginia to open a facility or other business operation.

Case Law Update

Georgia: In LT IT-2014-03, the Georgia Department of Revenue ruled that after a company converts to a limited liability company, it can continue to claim benefits awarded to the original company under the quality jobs tax credit program, including income tax carryforwards, withholding benefit carryforwards, and remaining credit installments.

European Union v. Washington: On February 23, 2015, the World Trade Organization (“WTO”) agreed to consider a European Union (“EU”) complaint against Washington over the state’s $8.7 billion package of tax incentives approved in 2013 (SB 5292) to encourage Boeing to manufacture its 777X in the state. SB 5952 included reduced business and occupation tax rates for aerospace suppliers, a sales tax exemption for materials used in the construction of aerospace manufacturing facilities, and tax breaks for property associated with those facilities.

The EU submitted a complaint to the WTO in December 2015, saying the incentives granted by Washington to Boeing violated the WTO’s Agreement on Subsidies and Countervailing Measures (SCM agreement) which bans subsidies that are contingent on the use of domestic goods. Specifically, the allegation is linked to two sections of SB 5952 that connected the incentives to the “siting of a significant commercial airplane manufacturing program in the state of Washington.” While most of the incentives simply required that such a siting occur, RCW 82.04.260(11)(e)(ii) revokes the preferential business and occupation tax rates if Boeing relocates the 777X outside Washington.

The complaint is only the latest chapter in a saga dating back to a 2004 complaint by the United States over subsidies offered to France-based Airbus, a major competitor to Boeing in the manufacture of commercial aircraft. That complaint was countered with a complaint over U.S. subsidies to Boeing. Both companies were eventually found to have received illegal subsidies, and in 2012, the WTO ruled that a variety of state and federal subsidies to Boeing violated the SCM agreement and harmed EU interests by undercutting Airbus.

States’ Evaluation and Review of Credit and Incentive Programs

Maryland: On February 12, 2015, An economic development task force appointed by Maryland lawmakers released a report with recommendations to improve the state’s business climate that include restructuring the state’s economic development programs and business tax incentives for better program efficacy.

New York: According to a February 5, 2015, report released by New York State Comptroller Thomas DiNapoli, it is unclear whether the $1.3 billion in incentives and credits given out annually by New York is creating jobs. The report focuses on the Empire State Development Corp. (ESDC) use of tax incentives, accountability and transparency in ESDC operations, and how improvements can be made.

The Task Force on Evaluating Economic Development Tax Expenditures, comprising New York City Council members and leaders from business, labor, policy, and academic communities, is reviewing New York City’s billions of dollars in economic development tax incentives to make sure the money is being put to good use. The Task Force began meeting at the end of January 2015 and has held two meetings to date. The Task Force is expected to deliver a report on its findings by the end of 2015 to the State Legislature. The Legislature’s review is needed for final approval before the city can change any laws.

North Carolina: In response to North Carolina Republican Gov. Pat McCrory’s proposal to expand the Job Development Incentive Grants program (“Program”), the North Carolina Justice Center reported that since its inception in 2002, more than half of all firms receiving incentive awards from the Program have failed to live up to their promises of job creation, investment, or wages. Given this report, it will be interesting if the Governor’s proposal will have any legs to stand on.

ARTICLE BY

Jennifer Zimmerman

Horwood Marcus & Berk Chartered

The Unhappy Intersection of Hospital Mergers and Antitrust Laws

The rapidly-evolving field of health care has been moving lately towards a single-minded goal – coordination of patient care in the name of efficiency and efficacy. Hospital systems are more and more often merging with other medical practices to better achieve the standards and goals of the Patient Protection and Affordable Care Act (“ACA”). TheNinth Circuit Court of Appeals, however, recently provided a stark reminder that the ACA isn’t the only law hospitals need to consider compliance with in these mergers.

Saltzer Medical Group in Nampa, Idaho, had been seeking to make a change from fee-for-service to risk-based reimbursement and approached St. Luke’s Health System in Boise in 2012about a formal partnership. They entered into a five-year professional service agreement that contained language about wanting to move away from fee-for-service reimbursement but without any clear language on making that change. Saltzer received a $9 million payment on the deal. Other hospital systems in the area, the FTC, and the Idaho Attorney General all filed suit to enjoin the merger.

The Ninth Circuit affirmed the district court’s holding that St. Luke’s violated state and federal antitrust laws when acquiring Saltzer. St. Luke’s argued that acquisition of the other provider would improve patient outcomes and care in the community of Nampa, Idaho, where Saltzer operates, but both courts agreed that the anticompetitive concerns surrounding the merger outweighed the benefits to quality care.

This case and other similar cases brought by the FTC provide a bleak outlook for health care providers looking to merge with other entities to provide care and efficiency under the aims of the ACA. While the court ultimately found that St. Luke’s aims were beneficial and not anticompetitive in and of themselves, antitrust laws only truly take the effect on competition into account, and courts are not ready to place quality of care under the ACA on equal footing.

ARTICLE BY

Molly Nicol Lewis

McBrayer, McGinnis, Leslie and Kirkland, PLLC

Oklahoma Federal Court Denies Summary Judgment to Employer on Professor’s Allegations He Was Denied Tenure After Reporting Inappropriate Facebook Posts by Fellow Professors

A federal court in Oklahoma recently denied summary judgment to Northeastern State University, finding that a professor’s discrimination and retaliation claims, among others, could proceed to trial. The professor, Dr. Leslie Hannah, was appointed chair of his department in 2009. The previous assistant chair, Dr. Brian Cowlishaw, was ineligible for the chair position pursuant to the University’s nepotism policy (his wife, Dr. Bridget Cowlishaw, was a professor in the department). During that period, Dr. Brian Cowlishaw posted the following comment on his Facebook page:

“Brian Hammer Cowlishaw /salutes in NSU’s direction / Good luck with that, then! [translation: I won’t be entering the ‘election’ for department chair, because what I offer, no one wants] Good luck! / salute!”

Then in response to a comment, he wrote:

“There will be an ‘election’ the first week of February. They’re making a f*****g indian chair.”

In 2010, Drs. Brian and Bridget Cowlishaw, and another professor, Dr. Donna Shelton, made disparaging comments on Facebook after Dr. Hannah scheduled a department meeting to be held outdoors by the river. In response to a post by Dr. Bridget Cowlishaw about not looking forward to the beginning of the academic year, Dr. Shelton wrote:

“Wonder if they sell body armor for use under regalia…”

In response to a post by Dr. Brian Cowlishaw about the camping trip, Dr. Bridget Cowlishaw wrote:

“Nah, our chair will bring all the handbaskets we need. He’s probably woven them himself.”

In response to a post about whether anyone attended, Dr. Bridget Cowlishaw wrote:

“Maybe they were all eaten by wolves.”

Dr. Hannah reported the posts to the University. The University found that the posts were inappropriate, and reprimanded the professors. Dr. Bridget Cowlishaw entered into a settlement agreement with the University whereby she resigned.

In 2011, Dr. Hannah reported to Human Resources: “I think the time has come for me to leave NSU. This seems to be an unsafe place for American Indians. I will be submitting my resignation . . . ” He then did not resign his position, but he did resign as department chair.

Dr. Hannah ultimately submitted his application for tenure and early promotion when he became eligible in late 2012. The committee that reviewed his application consisted of seven people, including Dr. Brian Cowlishaw and Dr. Shelton. The vote regarding Dr. Hannah was split 3/3 with one abstention, with Dr. Brian Cowlishaw and Dr. Shelton voting to deny the application. Thereafter, in early 2013, the University’s Dean reviewed the committee’s findings and denied Dr. Hannah’s application, stating that Dr. Hannah had “polarized the Department and displayed hostility toward other faculty and staff.” The Dean later stated that, while he was aware of past conflicts in the department, he was unaware of the inappropriate Facebook posts. Dr. Hannah filed a complaint with the University, and the University placed Dr. Hannah on administrative leave with pay for the remainder of his contract.

Dr. Hannah filed suit, including for discrimination and retaliation. The University brought a summary judgment motion. With respect to the discrimination and retaliation claims, the University’s main argument was that there was no causal connection between the Facebook posts in 2009 and 2010 and the denial of Dr. Hannah’s tenure in 2013.

The court was unconvinced that the passage of time between the Facebook posts and the denial of tenure defeated causation, stating: “Two years is not a significant amount of time. It is more than plausible and rather likely that after two years, Dr. Cowlishaw and Dr. Shelton still held some animosity toward Dr. Hannah for his reporting their Facebook posts, which resulted in their reprimands and possibly in the resignation of Dr. Cowlishaw’s wife.”

The Hannah case is another reminder for employers regarding the importance of implementing a good social media policy and training all employees to abide by it. Training employees not to make inappropriate posts in the first place trumps effective corrective action once the employer becomes aware of such posts. Although inHannah, the University’s initial response to the inappropriate posts was sufficient, the fact that the professors had made the posts in the first place played a key role in precluding the University from prevailing on summary judgment during later litigation.

ARTICLE BY

Alexander Nestor

Nisha Verma

Allen Matkins Leck Gamble Mallory & Natsis LLP

The National Law Forum

“Hello, Newman" Government Continues to Litigate Reversed Insider Trading Convictions

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