Vapor Intrusion Regulation and Environmental Remediation

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EPA recently issued two draft guidance documents on vapor intrusion and will accept comments on them through May 24, 2013. If finalized in current form, these guidance documents would formalize and enhance EPA’s existing practice of prioritizing vapor intrusion as a central issue in environmental remediation and could result in increases in the expense and effort required from responsible parties to achieve compliance for cleanup of contaminated sites conducted under federal authorities such as CERCLA or RCRA. They could also be highly influential in clean-ups overseen by state regulators.

Lastly, while intended for use in the regulatory context, recommendations in these guidance documents may be used to establish a standard of care in litigation involving vapor intrusion (e.g., RCRA citizen suits or common law toxic tort litigation).

Vapor intrusion is the migration of hazardous vapor from contaminated soil or groundwater into an overlying building.  It is considered potentially harmful to human health, creates risks in real estate transactions and financing due to potentially diminished property values and environmental liability, increases exposure in toxic tort litigation, and, in the federal regulatory context, is considered a pathway of possible exposure that must be evaluated as part of the evaluation and selection of a site remediation plan.

The first of these two guidance documents was prepared by EPA’s Office of Solid Waste and Emergency Response (OSWER) and is a comprehensive set of technical and policy recommendations regarding indoor air contamination arising from subsurface-source vapor intrusion attributable to all classes of volatile, or vapor-forming, chemicals (VI Guidance).[1]  The VI Guidance modifies and expands draft guidance on vapor intrusion issued by the agency in 2002 (2002 Draft VI Guidance), which provided general direction for evaluating the potential for vapor intrusion pathways at cleanup sites but omitted any measures for delineation and mitigation of potential risks.[2]  In a 2009 report, EPA’s Office of the Inspector General (OIG) recommended that EPA update the 2002 Draft VI Guidance to reflect the numerous technical and policy advancements made since that time in both the public and private sectors.

The second guidance document was prepared by EPA’s Office of Underground Storage Tanks (OUST) and is focused on investigations and assessments at petroleum contaminated sites where vapor intrusion by petroleum hydrocarbons may occur (Petroleum VI Guidance).[3]

VI Guidance

The VI Guidance presents a step-by-step vapor intrusion assessment plan, beginning with gathering and evaluating data for an initial conceptual site model, through collecting and evaluating additional data from various sources, and culminating in a risk assessment.  According to EPA, the VI Guidance addresses the recommendations made in the OIG’s 2009 report and takes into consideration more recent guidance developed by states and other technical working groups.  Some of the elements in this document may well trigger an increase in expense in addressing VI risks and lengthen the site evaluation process.

·        Superfund Five-Year Reviews: At Superfund sites that require five-year reviews,[4]EPA will gather data on vapor intrusion pathways and assess the sufficiency of the selected remedy for follow up in the five-year review report.  Therefore, according to the VI Guidance and related Directive 9200.2-84,[5] the five-year review process could result in the re-opening of established Superfund remedies to address vapor intrusion, “even if vapor intrusion was not addressed as part of the original remedial action.”[6]

·        Preemptive Mitigation/Early Action: EPA recommends consideration of engineered methods to reduce vapor in buildings (e.g., by installing a radon-type detection system or vapor barriers), even in the absence of all pertinent lines of evidence necessary to characterize the vapor intrusion pathway.  Any such measure would be an early effort to cut off exposure before completing investigations, but would not address the subsurface vapor source.  The agency’s rationale is that installation of engineered exposure controls in buildings is typically more cost-effective and less disruptive than conventional vapor intrusion investigations and subsurface characterization.  Once preemptive mitigation measures are installed, however, that may conclude only an initial step rather than complete remediation.  In the context of brownfields programs, treating preemptive mitigation now as only an interim solution may affect long term redevelopment plans.

·        Aggregate Noncancer Health Risk: Even when the exposure level for each contaminant at a site is below screening levels and it is assumed that each “acts independently (i.e., there are no synergistic or antagonistic toxicity interactions among the chemicals)”, the VI Guidance nevertheless proposes that a risk manager aggregate the individual noncancer health risks associated with each contaminant exposure to determine whether a response is warranted.  The aggregated risk is reflected in a “noncancer hazard quotient” that would ultimately drive the response.  This approach could be overly precautionary if the aggregated sum overstates the actual risks presented by the individual constituents.  Furthermore, the VI Guidance recommends use of multiple lines of evidence in calculating and evaluating these risks, a process that may prolong response decisions and negatively affect situations where quick resolution of VI issues is paramount (e.g., brownfield redevelopment projects).  On the other hand, evaluation of multiple lines of evidence may be more advantageous to the extent it provides for a more informed view of likely risk.

·        Background Levels: Time-integrated sampling of volatile chemicals (as opposed to short-duration, or “grab” sampling) at multiple locations in and around a site is, in EPA’s view, necessary to distinguish among potential sources of these chemicals (i.e., ambient sources, indoor sources, or vapor intrusion).  In the past, generic values of historic background concentrations have been used to characterize ambient or indoor source concentrations.  However, EPA now recommends against the use of these generic values, even those from peer-reviewed sources, and instead asserts that only site-specific data (e.g., sub-slab, indoor air, and ambient air sampling data) should be used.  This recommendation will likely lead to improved accuracy and better understanding of site conditions, while at the same time increasing the time and cost related to characterization efforts.

Petroleum VI Guidance

The 2009 OIG report expressed concern that EPA’s 2002 Draft VI Guidance did not address petroleum vapor intrusion at UST sites.  The proposed Petroleum VI Guidance seeks to address that concern for UST sites and RCRA-driven activities undertaken by private UST owners and operators.  In addition to the traditional chemicals found in petroleum products (such as benzene), the Petroleum VI Guidance would require consideration of vapor risks associated with gasoline additives (such as MTBE) and chemicals that develop from biodegradation of petroleum in soil and groundwater (such as methane).

As proposed, at least two parts of the Petroleum VI Guidance may, in comparison with past experience, result in increased response costs and delays for responsible parties.[7]  First, the Petroleum VI Guidance rejects the notion that a single sampling event is a sufficient basis to conclude that further vapor intrusion investigation is unnecessary because “periodic monitoring and sampling over more than one annual cycle is generally needed” to address fluctuations in groundwater levels and contaminant plumes over time.  Second, the Petroleum VI Guidance includes a number of recommendations that suggest EPA seeks to reduce reliance on models.  Specifically, when modeling requires the use of literature values due to the unavailability of site-specific data, EPA “recommends that an uncertainty analysis be conducted to provide error bounds on predictions of the computer model,” and that the results of any modeling exercise be verified with field data.

Considerations for Both Guidance Documents

In conclusion, both of these proposed guidance documents signal an increased focus on vapor intrusion within EPA.  As they are amended and finalized, there is a limited opportunity to comment on them to try to encourage a final guidance that is workable and effective for remediation of sites with vapor intrusion issues.  There may be ways to improve the guidance by clarifying where there is site-specific flexibility and where the guidance is overly prescriptive.

Notably, these guidance documents may help define the standard of care in the context of RCRA citizen suits or common law toxic tort litigation.  Clarifying key assumptions in the guidance may buffer some of that impact.

Even though these guidance documents are in draft form and will likely be subject to considerable comment, EPA regions and states can be expected to consult and employ them during what may be a long interval before they are finalized.  To the extent EPA or a state regulatory agency does so and an affected party disagrees with aspects of the guidance at issue, parties should be aware that the draft guidances are non-binding on their face.  The documents state that they do “not impose any requirements or obligations on the [EPA], the states, or the regulated community.”  Accordingly, parties should be free to suggest alternative, technically sound approaches to regulators.  Moreover, because these documents are solely drafts and have not been tested by external expertise that will be provided in public comment, reliance on them in their current state is arguably premature.

Given the potential long term impact on cleanup requirements, interested parties should evaluate the guidance and strongly consider submitting comments to EPA by May 24, 2013.  In light of the complex technical issues involved, interested parties may also wish to request that EPA extend the comment period.

[1] EPA OSWER, “Final Guidance for Assessing and Mitigating the Vapor Intrusion Pathway from Subsurface Sources to Indoor Air” (Apr. 11, 2013)

[2] EPA OSWER, “Draft Guidance for Evaluating the Vapor Intrusion to Indoor Air Pathway from Groundwater and Soils” (Nov. 29, 2002).  This draft document was never finalized.

[3] EPA OUST, “Guidance for Addressing Petroleum Vapor Intrusion at Leaking Underground Storage Tank Sites” (Apr. 9, 2013).

[4] Section 121 of CERCLA (42 U.S.C. § 9621) requires that remedial actions that result in any hazardous substances, pollutants, or contaminants remaining at the site be re-evaluated every five years to ensure that the remedy is and will continue to be protective of human health and the environment.

[5] “Assessing Protectiveness at Sites for Vapor Intrusion: Supplement to the ‘Comprehensive Five-Year Review Guidance’” (Nov. 14, 2012).

[6] In a related context, EPA officials have already acknowledged that later discovery of vapor intrusion at Superfund sites may trigger parties to litigate over whether site remedies provided for in consent decrees should be revisited under the reopener provisions in those decrees.  SeeInsideEPA, “EPA Official Says Vapor Intrusion May Drive Suits To Reopen Cleanup Pacts” (May 3, 2013), available at http://insideepa.com/201305032433234/EPA-Daily-News/Daily-News/epa-official-says-vapor-intrusion-may-drive-suits-to-reopen-cleanup-pacts/menu-id-95.html?s=mu. 

[7] These issues may also be relevant in scenarios involving vapor intrusion from sources other than those covered by the Petroleum VI Guidance.  However, because these points were emphasized in that guidance document, we highlight them here.

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Worker Adjustment and Retraining Notification Act (WARN) Liability And Private Equity Firms

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Last month’s decision out of the Delaware District Court in Woolery, et al. v. Matlin Patterson Global Advisers, LLC, et al. was an eye opener for private equity firms and other entities owning a controlling stake in a faltering business.  Breaking from the norm, the Court refused to dismiss private equity firm MatlinPatterson Global Advisers, LLC (“MatlinPatterson”) and affiliated entities from a class action WARN Act suit alleging that the 400-plus employees of Premium Protein Products, LLC (“Premium”), a Nebraska-based meat processer and MatlinPatterson portfolio company, hadn’t received the statutorily-mandated 60 days advance notice of layoffs.

According to the plaintiffs, Premium’s performance began to decline in 2008 and, upon the downturn, the defendants became more and more involved in Premium’s day-to-day operations, including by making business strategy decisions (e.g., to enter the kosher food market), terminating Premium’s existing President, and installing a new company President.  Things got bad enough that, in June 2009, the defendants decided to “furlough” all of Premium’s employees with virtually no notice and close the plant.  The defendants then, in November 2009, converted the furlough to layoffs, and Premium filed for bankruptcy.  According to the plaintiffs, Premium’s head of HR raised WARN Act concerns back in June, when the decision to close the plant and furlough the employees was made, and the defendants ignored the issue.

With Premium in bankruptcy, the plaintiffs, unsurprisingly, turned to MatlinPatterson and the other defendants as the targets of their WARN Act claim, asserting that they and Premium were a “single employer.”  The Court then applied the Department of Labor’s five-factor balancing test, namely (1) whether the entities share common ownership, (2) whether the entities share common directors or officers, (3) the existence of de facto exercise of control by the parent over the subsidiary, (4) the existence of a unity of personnel policies emanating from a common source, and (5) the dependency of operations between the two entities.  This test often favors private equity firms, and on balance it did so in Woolery too, with the Court finding that the plaintiffs had made no showing as to three of the five factors.  The Court nevertheless refused to grant the defendants’ motion to dismiss, holding that the complaint alleged that the defendants had exercised de facto control over Premium and then essentially giving that factor determinative weight.

No one should be surprised by the decision given the plaintiffs’ allegations, which had to be accepted as true at the motion to dismiss stage.  They presented an ugly picture of a private equity firm dictating the most critical decisions (to close plant, layoff employees) and then attempting to duck the WARN Act’s dictates. The decision is nevertheless a cautionary tale for private equity firms and at first blush it presents a catch 22: (a) do nothing and watch your investment sink or (b) get involved and risk WARN Act liability.

So what is a private equity firm, lender or majority investor to do?  Obviously, the best scenario is to build in the required 60-day notice period or, if applicable, utilize WARN Act exceptions, including the “faltering company” and “unforeseen business circumstances” exceptions.  Even where that’s not possible, private equity firms and other controlling investors need not take a completely hands off approach.  They would, however, be best-served (at least for WARN Act purposes) to do the following:

  • Provide only customary board-level oversight and allow the employer’s officers and management team to run the employer’s day-to-day operations
  • Although Board oversight and input can occur, continue to work through the management team on major decisions, including layoffs and potential facility closures
  • Avoid placing private equity firm or lender employees or representatives on the employer’s management team
  • Have the employer’s management team execute employment contracts with the employer, not the private equity firm or lender, and have the contracts, for the most part, create obligations only to the employer
  • Allow the employer to maintain its own personnel policies and practices, as well as HR oversight and function

What the courts are primarily concerned with in these cases are (a) a high degree of integration between the private equity firm or lender and the actual employer, particularly as to day-to-day operations, and (b) who the decision-maker was with regard to the employment practice giving rise to the litigation (typically the layoff or plant closure decision).  Private equity firms and lenders that have refrained from this level of integration have had, and should continue to have, success in avoiding WARN Act liability and returning the focus of the WARN Act discussion to the actual employer.

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Supreme Court (Sort Of) Approves “Picking Off” Strategy in Fair Labor Standards Act (FLSA) Collective Action Cases

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If you have ever received a complaint alleging minimum wage or overtime violations from one of your employees, the United States Department of Labor’s Wage and Hour Division, or a similar state agency (in Wisconsin, the Labor Standards Bureau of the Equal Rights Division), you have probably considered the possibility that other employees might raise similar claims.  Depending on the size of your workforce, this single-employee headache could quickly evolve into a class action or collective action migraine.

Under the Fair Labor Standards Act (FLSA), a single employee may file a wage and hour lawsuit on behalf of himself and other “similarly situated” employees.  The FLSA’s collective action mechanism requires potential plaintiffs to opt into the lawsuit, meaning that individuals must choose to participate in the case.  This mechanism differs from a class action lawsuit because individuals covered by a class certified by the court mustopt out of the case.  In other words, in a class action, an individual covered by a certified class must choose to not participate in the case.

Defense counsel have typically attempted to protect employers from prolonged and costly collective action litigation by “picking off” the named plaintiff(s) in lawsuits filed under the FLSA.  This “picking off” strategy refers to Rule 68 of the Federal Rules of Civil Procedure, which allows a defendant to make an offer of judgment to the plaintiff.  An offer of judgment amounts to giving the plaintiff the full relief requested in the complaint and costs accrued by the plaintiff.  A plaintiff’s acceptance of a Rule 68 offer of judgment moots (i.e., a dispute no longer exists) the case as to the plaintiff, thereby depriving the court of jurisdiction.

In the collective action context, however, employers have had mixed results on the issue of whether acceptance of a Rule 68 offer by the named plaintiff(s) also moots the claims of the potential collective group of affected employees.  The question also remained:  what happens when the named plaintiff(s) rejects the Rule 68 offer of judgment?

On Tuesday, April 16, 2013, the United States Supreme Court issued a decision, Genesis Healthcare Corp. v. Symczyk, that attempted to answer this question.  In this case, the employer, Genesis, made a Rule 68 offer of judgment to the plaintiff, Symczyk, while simultaneously answering the complaint and prior to Symczyk moving for conditional certification.  By its terms, the offer automatically expired after ten days.  Symczyk did not accept the offer, and Genesis moved for judgment in its favor, arguing that its offer of judgment mooted Symczyk’s claim and the potential collective action.  Symczyk did not contest Genesis’ argument that the offer fully satisfied her claim.  The district court agreed with Genesis and dismissed the case for lack of subject-matter jurisdiction.

The Court of Appeals for the Third Circuit agreed with the district court that Genesis’ Rule 68 offer mooted Symczyk’s claim, but it disagreed about the effect the offer had on the potential collective action.  The court of appeals held that allowing a defendant to “pick off” named plaintiffs for the purpose of avoiding the certification of a collective action would run contrary to the purpose of the collective action mechanism permitted by the FLSA.

On appeal, the Supreme Court held that a plaintiff “has no personal interest in representing putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness.”  According to the Supreme Court, a Rule 68 offer of judgment that renders the claims of the named plaintiff(s) moot also eliminates the plaintiff’s interest in the collective action.  More importantly, the Supreme Court held that a collective action under the FLSA, even if “conditionally certified” by a court, does not give the “class” of potential plaintiffs “an independent legal status.”  A “conditional certification” simply results in “the sending of court-approved written notice to employees[.]“  Thus, the Supreme Court has given some legitimacy to the strategy of “picking off” named plaintiffs by offering them full relief through a Rule 68 offer of judgment.

Note, however, that the Supreme Court did not hold that an unaccepted Rule 68 offer renders a claim (the named plaintiff’s or the collective action claim) moot.  Because Symczyk waived these arguments in the lower courts, the Supreme Court simply assumed, without deciding, that the unaccepted Rule 68 offer rendered her claim moot.

While, at first blush, the decision seems like a great win for employers, it has potential limitations, many of which Justice Elena Kagan points out in her dissent, including the following:

  1. Symczyk waived several important arguments throughout the litigation, including the argument that the unaccepted Rule 68 offer in fact did not moot her individual claim.
  2. The Genesis case addresses a scenario in which no other plaintiffs had yet joined the collective action (due in part to the timing of Genesis’ offer to Symczyk and her failure to move for certificaiton).
  3. The Court simply ignored the limitations of a Rule 68 offer of judgment, including that Rule 68 only gives courts authority to enter judgment when the plaintiff accepts the offer and that “[e]vidence of an unaccepted offer is not admissible except in a proceeding to determine costs.”

Despite the limitations of the Genesis decision, employers can take comfort in the Court’s indication of its leanings regarding collective actions.  In addition to the Court’s holding regarding the mootness issue, employers can also point to the Court’s statements calling into question the legitimacy of applying class action rules and precedent to collective actions under the FLSA.

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Center for Medicare and Medicaid Services (CMS) Proposes Increased Payments for Hospices

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On Monday, April 29, 2013, the Centers for Medicare and Medicaid Services (CMS) released a proposed rule that updates Medicare payment rules and rates for hospice agencies for fiscal year (FY) 2014.  The proposed rule also clarifies diagnosis coding and modifies quality measures in the hospice quality reporting program.

Major provisions of the proposed rule include:

  • 1.1 percent increase in FY 2014 payments. The increase is the net result of an estimated inpatient hospital market basket increase of 2.5 percent minus 0.7 percent for reductions mandated by the Affordable Care Act (ACA) and a 0.7 percent decrease in payments to hospices due to updated wage data and the continued phase-out of CMS’ wage index budget neutrality adjustment factor for hospices.
  • Hospices are to discontinue using certain non-specific diagnoses or non-principal diagnoses and, instead, should code with the principal diagnosis using the underlying condition that is the main reason for the patient’s care.
  • The ACA mandates that hospices begin reporting quality date in 2013 for the FY 2014 payment determination. Beginning with the FY 2016 payment determination, the rule proposes to eliminate the two current quality measurements and replace them with two other measures. The two measures CMS proposes to eliminate are: (1) the NQF-endorsed measure related to pain management, NQF #0209, and (2) the structural measure on participation in a Quality Assessment and Performance Improvement program.
  • Also for the FY 2016 payment determination, CMS proposes to implement the Hospice Item Set (HIS), which is a standardized patient-level data collection instrument. Hospices will need to complete the HIS upon admission and discharge for all patients starting July 1, 2014. Data collected from the HIS will factor into the payment determination for FY 2016.

Additional information on the proposed rule is available via CMS’s fact sheet.

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District Court Grants Motion to Compel Against Securities & Exchange Commission (SEC), Holding that “Facts” Are Not Work Product In SEC Confidential Witness Interviews

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In a recent Securities & Exchange Commission (“SEC”) investigation, the SEC interviewed three persons who had proffer agreements with the SEC and United States Attorney. In a subsequent SEC enforcement action, a defendant served interrogatories asking the SEC to identify the factual information disclosed in those proffer sessions. The SEC objected, and the defendant moved to compel. The SEC opposed the motion to compel, arguing that defendant sought information protected by the attorney work product doctrine, had not shown substantial need and unavailability, and had not deposed any of the witnesses, despite their identification in Rule 26 disclosures more than a year before. The magistrate judge granted defendant’s motion to compel, and the United States District Court for the Northern District of California confirmed the ruling. SEC v. Sells, No. C 11-4941 CW, 2013 WL 1411247 (N.D. Cal. Apr. 8, 2013).

There had already been an order in the case directing the SEC to answer identical interrogatories about another third-party witness. The SEC had acknowledged it was relying upon that witness’s statements as a basis for the allegations against the same defendant. The court rejected the SEC’s attorney work product objection because the interrogatories sought factual information, and not an attorney’s strategies or mental impressions. The court relied on an earlier decision, In re Convergent Technologies, 122 F.R.D. 555, 558 (N.D. Cal. 1988), in which the court reiterated the well-established principle that “the law does not permit counsel or litigants to use the work product doctrine to hide the facts themselves.” Nor does it shield from discovery the identities of the persons from whom an attorney learned such facts or the existence or non-existence of documents.

An interesting side note about the three witnesses is that their interviews were not recorded, unlike the other fourteen witnesses in this case. Because of this, any inconsistencies, disclosures of motives for their proffers or other potential impeachment evidence were not “otherwise available” to defense counsel. The SEC also advised the court that the three witnesses might testify at trial.

The lesson of this case is not to underestimate the value to defendants in SEC enforcement proceedings of specific, simply stated interrogatories. The SEC was not ordered to turn over its attorneys’ notes. Instead, it was ordered to answer interrogatories. This case also reminds lawyers not to give up, even when your adversary is far more powerful. In the words of the magistrate judge who handled “every possible objection” that the SEC had asserted to avoid answering, “Sunshine is ordinarily the best medicine for a party that is keeping discoverable information hidden in the dark. But where, as here, one party is repeatedly withholding relevant information, stronger medicine may be required.”

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No “Safe Harbor” for BitTorrent Website Operator

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The U.S. Court of Appeals for the Ninth Circuit affirmed a summary judgment ruling in favor of seven film studios finding that the defendant induced third parties to download infringing copies of the plaintiffs’ copyrighted works. Columbia Pictures Industries, Inc., et al.  v. Gary Fung, et al., Case No. 10-55946 (9th Cir., Mar.21, 2013) (Berzon, J.).

Seven film studios—including Columbia Pictures, Disney and Twentieth Century Fox—sued Gary Fung and his company isoHunt Technologies, claiming that Fung induced third parties to download infringing copies of the studios’ copyrighted works through Fung’s websites, such as torrentbox.com and isohunt.com—websites that help users find copies of videos to download and stream through a type of peer-to-peer file sharing network.

The district court found Fung liable for contributory copyright infringement for inducing others to infringe the studios’ copyrights and also found that Fung was not entitled to protection from damages liability under the safe harbor provisions of the Digital Millennium Copyright Act (DMCA).  After a permanent injunction was issued, Fung appealed.

On appeal, Fung challenged the full holding, including the scope of the injunction claiming that it was vague, punitive and an impediment to free speech.  The 9th Circuit, citing the Supreme Court decision in Grokster III (which also dealt with peer-to-peer file sharing technology), analyzed the facts of the present case under the four elements of the Grokster III inducement principle:  the distribution of a device or product, acts of infringement, an object of promoting its use to infringe copyright and causation.

Inducement Liability Under Grokster III

With respect to the first element of the Grokster III inducement liability standard, Fung argued that he did not develop or distribute products, nor did he develop the BitTorrent protocol used by his websites.  The 9th Circuit, however, distinguished copyrights as expression that are not necessarily in the form of products or devices. Thus, the court concluded that a copyright can be infringed through “culpable actions resulting in impermissible reproductions of copyrighted expression,” even if such actions are the provision of services used in accomplishing the infringement.

Fung was not able to rebut the second “acts of infringement” Grokster III factor after the studios presented evidence that Fung’s services were widely used to infringe copyrights by allowing uploading and downloading of copyrighted material. Accordingly, the court found for the studios on the second factor, noting that the “predominant use” of Fung’s services was for copyright infringement.

As to the third Grokster III factor, the court agreed with Fung that mere knowledge of a potential to infringe, or knowledge of actual infringing uses of a product or service, is not enough for liability.  Nevertheless, the court found there was more than enough evidence that Fung offered his services with the object to promote their use to infringe copyrighted material.  Specifically, the court found that the evidence showed Fung actively encouraged uploading files of specific copyrighted material; he provided links for certain movies and urged users to download those movies; he affirmatively responded to requests for help in locating and playing copyrighted materials; and, he even personally instructed users on how to burn infringing files to DVDs.  The court also referenced two points of circumstantial evidence raised by the Grokster III opinion, namely, that Fung took no steps to develop filtering tools to diminish infringing activity and that he generated revenue by selling advertising space on his websites.

Finally, as to causation, the court adopted the studios’ interpretation of causation and held that the acts of infringement by third parties need only be caused by the product distributed or services provided.  This was contrary to Fung’s theory of causation (which was also joined by amicus curiae, Google) wherein Fung claimed that the infringement must be directly caused by a defendant’s inducing messages.

The Digital Millennium Copyright Act “Safe Harbor” Provisions

Fung also asserted affirmative defenses under three of the DMCA’s safe harbor provisions, 17 U.S.C. §512(a), (c) and (d). Although the studios argued that there can never be a DMCA safe harbor defense to contributory copyright liability inducement, the 9th Circuit disagreed, noting that the safe harbor provisions do not exclude vicarious or contributory liability from its protections. Even so, the court denied all of Fung’s safe harbor defenses.

In particular, the court concluded that Fung did not qualify for protection under §512(a) for transitory digital network communications because Fung’s torrent file trackers, not the third party users, were responsible for selecting the copyrighted data to be transmitted.

The court also concluded that § 512(c), relating to information residing on networks or systems at the direction of the users, was also not applicable because Fung had actual and “red flag” knowledge of infringing activity on his system due to his own active encouragement of infringement, as well as the fact that Fung did not dispute evidence that he personally used his isohunt.com website to download infringing material.

According to the 9th Circuit, Fung did not qualify for protection under §512(c) or §512(d) (for providers of information location tools) because Fung received a “financial benefit” from his services by selling ad space and because he had the “right and ability to control” the infringing activity, which was shown through evidence that Fung exerted substantial influence on the activities of the users of his websites.

Finding no available defenses under the DMCA safe harbors, the court affirmed summary judgment for the studios on the issue of liability under contributory copyright infringement.  However, the court found various terms of the lower court’s permanent injunction to be vague and unduly burdensome and remanded to the district court to modify certain employment prohibitions and to provide more specific language for several terms in the injunction.

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Recent Social Media Developments Impacting Employers

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NLRB: Latest Decisions Addressing Social Media Policies and Activities

Within the past several months, the National Labor Relations Board (“NLRB“) has issued four precedent-setting opinions addressing the legality of an employer’s use of social media as a basis for taking adverse employment action. These decisions apply to both unionized and non-unionized workforces.

The key issue in each of these cases was whether the employer’s actions compromised the right of employees to engage in “protected concerted activities” for the purpose of their “mutual aid and protection.” However, as noted in a prior alert, recent federal case law could void all NLRB decisions dating back to January 4, 2012 (including those discussed below). Until there is clarity the NLRB decisions continue to be significant in shaping social media use, policy and practice.

On April 19, 2013, the NLRB, in Design Technology Group, LLC, found that an employee’s Facebook posts that criticized a manager’s handling of employee concerns were a “classic connected protected activity” under the National Labor Relations Act (“the Act”).

In that case, workers had approached their manager about closing the store they worked in at 7 PM instead of 8 PM, because of safety concerns. The manager advised that she would discuss those concerns with corporate officials, but the issue was never resolved. Subsequently, two employees posted messages on Facebook that were critical of how the manager handled that issue. Another employee showed the manager those posts and six days later, both employees who made the critical Facebook posts were fired by the manager.

The NLRB determined that the Facebook posts were part of the employees’ efforts to convince their employer to close the store earlier in the evening, based on their concerns about working late in an unsafe neighborhood. The NLRB found that those posts were protected under the Act and that the employees’ terminations constituted unfair labor practices.

Design Technology comes on the heels of three other NLRB social media rulings issued late last year.

In Hispanic United of Buffalo (December 14, 2012), the NLRB held that the termination of five employees for violating an employer’s policies on the basis of their social media activity was unlawful. In that case, five employees posted comments on Facebook that were critical of a co-worker who was scheduled to meet with and complain to management about their work performance. The employer terminated the five employees for “bullying and harassing” the co-worker in violation of its policies.

Hispanics United of Buffalo applied settled NLRB law regarding oral communications among co-workers to the social media context. Under NLRB precedent, employees’ comments regarding the terms and conditions of their employment are protected if their comments are “concerted” — meaning they are “‘engaged in, with or on the authority of other employees,” not only by “one employee on behalf of himself.” Finding the actions of these employees to be protected, the NLRB set a relatively low threshold for interpreting social media activity as protected concerted activity under the Act.

The Hispanics United decision is especially controversial because it may conflict with an employer’s competing obligation under federal and state discrimination laws to prevent workplace harassment. And, the decision may ultimately be in conflict with workplace anti-bullying laws in those states where such legislation is being actively considered. In Karl Knauz Motors, Inc. (September 28, 2012), the NLRB ordered another employer to rescind its social media policy. In that case, the employer terminated the employee for multiple reasons, including violation of the employer’s “Courtesy” rule requiring employees to be “courteous, polite and friendly” to customers, vendors, suppliers and fellow employees and not to use “language which injures the image or reputation of the Dealership.”

The NLRB held that the “Courtesy” rule violated the NLRA because employees could “reasonably construe its broad prohibition against ‘disrespectful’ conduct and ‘language’ which injures the image or reputation of the Dealership as encompassing Section 7 activity.” However, the NLRB upheld the employee’s termination, finding it was not motivated by protected concerted activity, but rather was solely based on the employee’s Facebook postings that did not relate to the terms and conditions of his or any other employee’s employment. The NLRB did not address whether other posts would be protected by the Act.

In Costco Wholesale Corp. (September 7, 2012), the NLRB ruled that an employer’s overbroad social media policy violated the National Labor Relations Act because it prohibited employees from posting statements “that damage the Company, defame any individual or damage any person’s reputation or violate the policies outlined in the Costco Employee Agreement.” The NLRB ordered Costco to rescind the policy based on its finding that the policy inhibited employees from engaging in protected concerted activity.

NJ Legislative Update: Proposed Law Seeks to Protect Employee and Job Applicant Passwords

A-2878, a bill that prohibits employers from requiring, or requesting, a current or prospective employee to reveal, as a condition of employment, his or her user name, password or other means of accessing the employee’s personal social media account, has passed both houses of the NJ Legislature and is awaiting further action by Governor Chris Christie. While it is not clear as of this writing whether Governor Christie will sign or veto this bill, the implications to employers of this potential new law are far reaching.

If enacted, this bill would prohibit employers from even asking an employee or prospective employee whether he or she has a profile on a social media site. In addition, the bill would prohibit employers from requiring prospective employees to waive or limit any protection granted to them under the law as a condition of applying for or receiving an offer of employment. It provides for a $1,000 civil penalty for the law’s first violation and $2,500 for each subsequent violation. If Governor Christie signs this bill into law, New Jersey would join other states that have enacted legislation preventing employers from requesting social media access information, including Arkansas, California, Delaware, Illinois, and Michigan, though it would be the first state to prevent employers from inquiring if employees or applicants have a social media account.

Notably, the bill does not prevent employers from performing their own online search to determine if a prospective or current employee is on a social media site. Accordingly, if a social media account is publically available, an employer would not run afoul of this proposed law by independently viewing an employee’s or prospective employee’s social media account. This type of activity could have other potential pitfalls associated with it however, such as learning protected class information about applicants.

We will continue to monitor the signing status of this bill.

What These Decisions and the Prospective NJ Statute Mean to Employers

In light of the foregoing, we recommend the following:

  • Employers should review and consider revising social media polices and hiring practices to address the NLRB decisions, the new NJ legislation, if enacted, and EEO issues associated with searches on applicants.
  • With respect to policies, employers should ensure that prohibitions placed on employees’ communications do not prohibit employees’ rights to engage in protected concerted activity.
  • Employers should continue to exercise caution when disciplining or terminating any employee based on his/her social media activities and should also consider training its managers in this area so that they do not inadvertently run afoul of these laws.
  • It is important to consult with counsel to consider whether an employee’s comments or posts would be deemed to be protected concerted activity under the Act before any disciplinary action is taken by the employer based on those comments or posts.
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Is Your Smartphone Costing You Thousands Each Month in Billable Time?

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Back in the early 2000s, I had a friend who’d recently purchased a new-fangled flip-style mobile phone. Oohing and aahing, I asked if he loved all the things he could do with it. “I can play games on it and check the news, stock prices, sports scores, and weather” he lamented, “but I can’t figure out how to just make a phone call.”

Flash forward a decade to the ubiquity of smartphones, with their sleek design, shiny screens, and bright, colorful icons. Nearly every lawyer, young and old, has one. Newsletters and blog posts extol the smartphone’s positive impact on a lawyer’s productivity. New apps appear in the store almost daily to assist with note taking, dictation, file creation and storage, calendaring, practice management, and time tracking, to name a few. Bar associations and professional organizations host conferences, meetings, and CLEs to offer practical training on making the most of tablets, smartphones and cloud services.

Despite this, when lawyers use their smartphones for the most basic of tasks – talking on the phone – they struggle with capturing and billing that time. Are you one of them? Ask yourself the following questions:

  • Do I spend a lot of billable time on the phone?
    Surveys show that lawyers spend nearly one-quarter of their billable time on the phone, with over 70% percent of that time spent on the desktop phone in their office.
  • Do I use my mobile smartphone for work calls when I’m out of the office?
    If you do, you’re not alone. Lawyers report spending an average of 23 percent of their time working outside the office, during which time over 85 percent make work calls on smartphones.
  • Have I struggled finding good smartphone apps to use for work?
    Although a majority of lawyers responding to the 2012 ABA Legal Technology Survey use their own personal devices for work (making them part of the growing Bring Your Own Device, or BYOD, movement), two-thirds have never downloaded a general business app, while even fewer have tried a legal-specific smartphone app.
  • Have I ever forgotten or been unable to bill my time spent on the phone?
    You’re human and you’re busy, so you’re probably like most lawyers, who estimate that they lose a conservative five billable hours related to phone calls each month. Some of these hours are for forgotten, undocumented, or untimed calls. Others come from time spent reconstructing the call history for billing purposes, an arduous and inaccurate task.

If you answered yes to these questions, then that ubiquitous productivity tool – your smartphone – may make you more productive but still not help your bottom line. At an average hourly billable rate of $250, an office of four lawyers stands to lose nearly $5,000 every month, just on billable phone time.

With numbers like these, it’s never been more important that attorneys have access to timekeeping solutions that make it simple to track billable hours while on the phone. There are many time-trackers on the market, but common complaints about them include:

  • They’re too complex and full of bells and whistles that I will never use” (just like my friend with the fancy new flip phone).
  • “They require the use of a timer, which I often forget to start and stop.”
  • “They don’t capture time on the desktop phone, where I make the majority of my calls.”
  • “There’s too much manual entry required to create detailed records. Postponing the entry does nothing to alleviate the chore of billing reconciliation at the end of the month.”

When evaluating the options, consider these requirements:

  • Choose a solution that’s so simple, compliance is a snap.
    Look for a solution that is compatible with both mobile and desktop phones. From here, you can easily capture the call details and duration as it happens, no matter which device you’re using. In seconds, you can ensure that every minute spent on the phone is billed.
  • Simplify the billing reconciliation process with 24×7 access to the captured call data.
    A worthwhile solution will reclaim the hours previously spent digging through voicemail, paper phone messages, calendar appointments, and mobile call logs to reconstruct billable phone time. The internet is the perfect platform for the billing staff to gain access to captured call data from any browser whenever and wherever needed.
  • Impress your clients with descriptive, auditable billing records.
    Capturing comprehensive call details as they happen will improve your billing accuracy and show your clients exactly what they’re paying for. The more detail you can provide, the more they will trust your records, and the more likely you will be to collect on each invoice. Greater detail will help speed up your billing reconciliation time as well.
  • Minimize training time and increase usage by ensuring that the app is virtually identical on any device.
    If the process of capturing call information is the same on both office and mobile phones, it will quickly become a habit, no matter which device is in use. Consolidating the records generated from every device in a single, intuitive place online will help billing staff easily export and create line items for invoices.

While many time-trackers offer bells and whistles that sound great on paper, their complexity leaves many lawyers feeling like my friend who couldn’t figure out how to make a call on his new flip phone. Focus on simplicity to find a telephone timekeeping solution that you’ll actually use. An app that works automatically on any device will eliminate lost revenue for billable phone time, provide an audit trail for your clients, and allow your lawyers to be both productive and profitable.

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Where Do Your Interests Lie Under Chapter 15 of the Bankruptcy Code?

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Determining a foreign debtor’s “center of main interests” and its effect on creditors’ rights

When doing business with a foreign company, it is important to identify the company’s “center of main interests” (“COMI”) as creditors may find themselves bound by the laws of the COMI locale. If a company initiates insolvency proceedings outside the U.S., it must petition a U.S. court under Chapter 15 of the Bankruptcy Code for recognition of the foreign proceeding. If the foreign proceeding is found to be a “foreign main proceeding” (i.e., a proceeding pending where the debtor has its COMI), Chapter 15 provides certain automatic, nondiscretionary relief, including an automatic stay of all proceedings against the debtor in the U.S. Therefore, when faced with a foreign insolvency proceeding, U.S. creditors’ rights will often be determined in the jurisdiction where the debtor’s COMI is located. However, despite its significance, COMI is left undefined by the statute, which prompted the Second Circuit Court of Appeals in Morning Mist Holdings Ltd. v. Krys, 2013 U.S. App. LEXIS 7608 (2nd Cir. April 16, 2013) to determine the relevant factors for locating a COMI and the appropriate time frame to consider those factors.

In Morning Mist, Miguel Lomeli and Morning Mist Holdings Limited (collectively, “Morning Mist”) filed a derivative action in New York state court against Fairfield Sentry Limited (the “Debtor”). The Debtor was one of Bernie Madoff’s largest “feeder funds,” having invested over $7 billion in the scheme. Shortly after the commencement of the derivative action, the Debtor initiated liquidation proceedings in the British Virgin Islands (the “BVI”). Then, in accordance with Chapter 15 of the Bankruptcy Code, the Debtor petitioned the U.S. Bankruptcy Court in the Southern District of New York for recognition of the BVI liquidation proceeding. The bankruptcy court granted the Chapter 15 petition, recognizing the BVI liquidation as a “foreign main proceeding” and imposing an automatic stay on all proceedings against the Debtor in the U.S., including the derivative action. The district court upheld the bankruptcy court’s decision, and Morning Mist appealed to the Second Circuit, arguing that the lower courts improperly found the BVIs to be the Debtor’s COMI.

To determine the Debtor’s COMI, the Second Circuit examined which factors should be considered and over what time period. Tackling the temporal element first, the Court concluded that the Chapter 15 petition filing date is the relevant review period, subject to an inquiry into whether the process has been manipulated. To offset a debtor’s ability to manipulate its COMI, a court may also review the period between the initiation of the foreign liquidation proceeding and the filing of the Chapter 15 petition. The Court squarely rejected Morning Mist’s suggestion that courts must consider a debtor’s entire operational history.

As for the appropriate factors to consider in locating a COMI, the Second Circuit held that any relevant activities, including liquidation activities and administrative functions, may be considered in a COMI analysis. Elaborating, the Court held that Chapter 15 creates a rebuttable presumption that the country where the debtor has its registered office will be its COMI, but recognized that courts have focused on a variety of other factors as well, including the location of the debtor’s headquarters, the location of those who actually manage the debtor, the location of the debtor’s primary assets, the location of the majority of the debtor’s creditors or the majority of the creditors who would be affected by the case, and/or the jurisdiction whose law would apply to most disputes. However, the Second Circuit emphasized that consideration of these factors is neither required nor dispositive.

Finally, Morning Mist argued that Chapter 15’s public policy exception (“Nothing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.”) applied because the BVI proceedings were confidential and therefore “cloaked in secrecy.” The Second Circuit quickly dismissed this argument explaining that the public policy exception should be read restrictively and invoked only under exceptional circumstances concerning matters of fundamental importance for the enacting State. Recognizing that court pleadings can be sealed in U.S. cases, including bankruptcy cases, the Second Circuit found that the confidentiality of the BVI bankruptcy proceedings did not offend U.S. public policy.

The Morning Mist case adds some clarity to a significant issue in cross border insolvencies by highlighting the importance of understanding the internal operations and structure of foreign companies—factors that could affect the ability of U.S. creditors to seek redress in U.S. courts.

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The Good Angel Investor (Part 1): Doing the Deal

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At a time when lean startups often require considerably less than $1 million dollars to develop the proverbial minimum viable product and even validate the same with some customers, angel investors are playing an increasingly important role in startup financings.  And that’s a good thing, particularly in places outside of the major venture capital centers, where institutional venture capital is scarce.

Most startups successfully launched with angel capital will want to tap deeper pools of capital later on, often from traditional venture capital investors.  That being the case, entrepreneurs and their angel investors should make sure that the structure and terms of angel investments are compatible with the likely needs of downstream institutional investors.  Herewith, some of the issues entrepreneurs and angels should keep in mind when they sit down and negotiate that first round of seed investment.

  1. Don’t get hung up on valuation.  Seed stage opportunities are difficult to put a value on, particularly where the entrepreneur and/or the investor have limited experience.  Seriously mispricing a deal – whether too high or too low – can strain future entrepreneur/investor relationships and even jeopardize downstream funding.  If you and your seed investor are having trouble settling in on the “right” price for your deal, consider structuring the seed round as convertible debt, with a modest (10%-30%) equity kicker.  Convertible debt generally works where the seed round is less than one-half the size of the subsequent “A” round and the A round is likely to occur within 12 months of the seed round based on the accomplishment of some well-defined milestone.
  1. Don’t look for a perfect fit in an off-the-shelf world.  In the high impact startup world, probably 95% of seed deals take the form either of convertible debt (or it’s more recent twin convertible equity) or “Series Seed/Series AA” convertible preferred stock (a much simplified version of the classic Series A convertible preferred stock venture capital financing).  Unless you can easily explain why your deal is so out of the ordinary that the conventional wisdom shouldn’t apply, pick one of the two common structures and live with the fact that a faster, cheaper, “good enough” financing is usually also the best financing at the seed stage.
  1. On the other hand, keeping it simple should not be confused with dumbing it down.  If the deal is not memorialized in a mutually executed writing containing all the material elements of the deal, it is not a “good enough” financing.  The best intentioned, highest integrity entrepreneurs and seed investors will more often than not recall key elements of their deal differently when it comes time to paper their deal – which it will at the A round, if not before.  And the better the deal is looking at that stage, the bigger those differences will likely be.
  1. Get good legal advice.  By “good” I mean “experienced in high impact startup financing.”  Outside Silicon Valley, the vast majority of reputable business lawyers have little or no experience representing high impact entrepreneurs and their investors in financing transactions.  When these “good but out of their element” lawyers get involved in a high impact startup financing the best likely outcome is a deal that takes twice as long, and costs twice as much, to close.  More likely outcomes include unconventional deals that complicate or even torpedo downstream financing.  This suggestion is even more important if your deal is perchance one of those few that for some reason does need some custom fitting.
  1. Finally, a pet peeve.  If you think your startup’s future includes investments by well regarded institutional venture capital funds, skip the LLC tax mirage and just set your company up as a Delaware “C” corporation.  If you want to know why, ask one of those “experienced high impact startup lawyers” mentioned in point 4 above.
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