Tag: government

Threats of Antitrust Enforcement in the Supply Chain

With steep inflation and seemingly constant disruptions in supply chains for all manner of goods, the Biden Administration has turned increasingly to antitrust authorities to tame price increases and stem future bottlenecks. These agencies have used the myriad tools at their disposal to carry out their mandate, from targeting companies that use supply disruptions as cover for anti-competitive conduct, to investigating industries with key roles in the supply chain, to challenging vertical mergers that consolidate suppliers into one firm. In keeping with the Administration’s “whole-of-government” approach to antitrust enforcement, these actions have often involved multiple federal agencies.

Whatever an entity’s role in the supply chain, that company can make a unilateral decision to raise its prices in response to changing economic conditions. But given the number of enforcement actions, breadth of the affected industries, and the government’s more aggressive posture toward antitrust enforcement in general, companies should tread carefully.

What follows is a survey of recent antitrust enforcement activity affecting supply chains and suggested best practices for minimizing the attendant risk.

Combatting Inflation as a Matter of Federal Antitrust Policy

Even before inflation took hold of the U.S. economy, the Biden Administration emphasized a more aggressive approach to antitrust enforcement. President Biden appointed progressives to lead the antitrust enforcement agencies, naming Lina Kahn chair of the Federal Trade Commission (FTC) and Jonathan Kanter to head the Department of Justice’s Antitrust Division (DOJ). President Biden also issued Executive Order 14036, “Promoting Competition in the American Economy.” This Order declares “that it is the policy of my Administration to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony….” To that end, the order takes a government-wide approach to antitrust enforcement and includes 72 initiatives by over a dozen federal agencies, aimed at addressing competition issues across the economy.

Although fighting inflation may not have been the initial motivation for the President’s agenda to increase competition, the supply disruptions wrought by the COVID-19 pandemic and persistent inflation, now at a 40-year high, have made it a major focus. In public remarks the White House has attributed rising prices in part to the absence of competition in certain industries, observing “that lack of competition drives up prices for consumers” and that “[a]s fewer large players have controlled more of the market, mark-ups (charges over cost) have tripled.” In a November 2021 statement declaring inflation a “top priority,” the White House directed the FTC to “strike back at any market manipulation or price gouging in this sector,” again tying inflation to anti-competitive conduct.

The Administration’s Enforcement Actions Affecting the Supply Chain

The Administration has taken several antitrust enforcement actions in order to bring inflation under control and strengthen the supply chain. In February, the DOJ and FBI announced an initiative to investigate and prosecute companies that exploit supply chain disruptions to overcharge consumers and collude with competitors. The announcement warned that individuals and businesses may be using supply chain disruptions from the COVID-19 pandemic as cover for price fixing and other collusive schemes. As part of the initiative, the DOJ is “prioritizing any existing investigations where competitors may be exploiting supply chain disruptions for illicit profit and is undertaking measures to proactively investigate collusion in industries particularly affected by supply disruptions.” The DOJ formed a working group on global supply chain collusion and will share intelligence with antitrust authorities in Australia, Canada, New Zealand, and the UK.

Two things stand out about this new initiative. First, the initiative is not limited to a particular industry, signaling an intent to root out collusive schemes across the economy. Second, the DOJ has cited the initiative as an example of the kind of “proactive enforcement efforts” companies can expect from the division going forward. As the Deputy Assistant Attorney General for Criminal Enforcement put it in a recent speech, “the division cannot and will not wait for cases to come to us.”

In addition to the DOJ’s initiative, the FTC and other federal agencies have launched more targeted inquiries into specific industries with key roles in the supply chain or prone to especially high levels of inflation. Last fall, the FTC ordered nine large retailers, wholesalers, and consumer good suppliers to “provide detailed information that will help the FTC shed light on the causes behind ongoing supply chain disruptions and how these disruptions are causing serious and ongoing hardships for consumers and harming competition in the U.S. economy.” The FTC issued the orders under Section 6(b) of the FTC Act, which authorizes the Commission to conduct wide-ranging studies and seek various types of information without a specific law enforcement purpose. The FTC has in recent months made increasing use of 6(b) orders and we expect may continue to do so.

Amid widely reported backups in the nation’s ports, the DOJ announced in February that it was strengthening its partnership with and lending antitrust expertise to the Federal Maritime Commission to investigate antitrust violations in the ocean shipping industry. In a press release issued the same day, the White House charged that “[s]ince the beginning of the pandemic, these ocean carrier companies have been dramatically increasing shipping costs through rate increases and fees.” The DOJ has reportedly issued a subpoena to at least one major carrier as part of what the carrier described as “an ongoing investigation into supply chain disruption.”

The administration’s efforts to combat inflation through antitrust enforcement have been especially pronounced in the meat processing industry. The White House has called for “bold action to enforce the antitrust laws [and] boost competition in meat processing.” Although the DOJ suffered some well-publicized losses in criminal trials against some chicken processing company executives, the DOJ has obtained a $107 million guilty plea by one chicken producer and several indictments.

Most recently, the FTC launched an investigation into shortages of infant formula, including “any anticompetitive [] practices that have contributed to or are worsening this problem.” These actions are notable both for the variety of industries and products involved and for the multitude of enforcement mechanisms used, from informal studies with no law enforcement purpose to criminal indictments.

Preventing Further Supply-Chain Consolidation

In addition to exposing and prosecuting antitrust violations that may be contributing to inflation and supply issues today, the Administration is taking steps to prevent further consolidation of supply chains, which it has identified as a root cause of supply disruptions. DOJ Assistant Attorney General Kanter recently said that “[o]ur markets are suffering from a lack of resiliency. Among many other things, the consequences of the pandemic have revealed supply chain fragility. And recent geopolitical conflicts have caused prices at the pump to skyrocket. And, of course, there are shocking shortages of infant formula in grocery stores throughout the country. These and other events demonstrate why competition is so important. Competitive markets create resiliency. Competitive markets are less susceptible to central points of failure.”

Consistent with the Administration’s concerns with consolidation in supply chains, the FTC is more closely scrutinizing so-called vertical mergers, combinations of companies at different levels of the supply chain. In September 2021, the FTC voted to withdraw its approval of the Vertical Merger Guidelines published jointly with the DOJ the year before. The Guidelines, which include the criteria the agencies use to evaluate vertical mergers, had presumed that such arrangements are pro-competitive. Taking issue with that presumption, FTC Chair Lina Khan said the Guidelines included a “flawed discussion of the purported pro-competitive benefits (i.e., efficiencies) of vertical mergers” and failed to address “increasing levels of consolidation across the economy.”

In January 2022, the FTC and DOJ issued a request for information (RFI), seeking public comment on revisions to “modernize” the Guidelines’ approach to evaluating vertical mergers. Although the antitrust agencies have not yet published revised Guidelines, the FTC has successfully blocked two vertical mergers. In February, semiconductor chipmaker, Nvidia, dropped its bid to acquire Arm Ltd., a licenser of computer chip designs after two months of litigation with the FTC. The move “represent[ed] the first abandonment of a litigated vertical merger in many years.” Days later Lockheed Martin, faced with a similar challenge from the FTC, abandoned its $4.4 billion acquisition of missile part supplier, Aerojet Rocketdyne. In seeking to prevent the mergers, the FTC cited supply-chain consolidation as one motivating factor, noting for example that the Lockheed-Aerojet combination would “further consolidate multiple markets critical to national security and defense.”

Up Next? Civil Litigation

This uptick in government enforcement activity and investigations may lead to a proliferation of civil suits. Periods of inflation and supply disruptions are often followed by private plaintiff antitrust lawsuits claiming that market participants responded opportunistically by agreeing to raise prices. A spike in fuel prices in the mid-2000s, for example, coincided with the filing of class actions alleging that four major U.S. railroads conspired to impose fuel surcharges on their customers that far exceeded any increases in the defendants’ fuel costs, and thereby collected billions of dollars in additional profits. That case, In re Rail Freight Fuel Surcharge Antitrust Litigation, is still making its way through the courts. Similarly, in 2020 the California DOJ brought a civil suit against two multinational gas trading firms claiming that they took advantage of a supply disruption caused by an explosion at a gasoline refinery to engage in a scheme to increase gas prices. All indicators suggest that this trend will continue.

Reducing Antitrust Risk in the Supply Chain and Ensuring Compliance

Given the call to action for more robust antitrust enforcement under Biden’s Executive Order 14036 and the continued enhanced antitrust scrutiny of all manner of commercial activities, companies grappling with supply disruptions and rampant inflation should actively monitor this developing area when making routine business decisions.

As a baseline, companies should have an effective antitrust compliance program in place that helps detect and deter anticompetitive conduct. Those without a robust antitrust compliance program should consider implementing one to ensure that employees are aware of potential antitrust risk areas and can take steps to avoid them. If a company has concerns about the efficacy of its current compliance program, compliance reviews and audits – performed by capable antitrust counsel – can be a useful tool to identify gaps and deficiencies in the program.

Faced with supply chain disruptions and rampant inflation, many companies have increased the prices of their own goods or services. A company may certainly decide independently and unilaterally to raise prices, but those types of decisions should be made with the antitrust laws in mind. Given the additional scrutiny in this area, companies may wish to consider documenting their decision-making process when adjusting prices in response to supply chain disruptions or increased input costs.

Finally, companies contemplating vertical mergers should recognize that such transactions are likely to garner a harder look, and possibly an outright challenge, from federal antitrust regulators. Given the increased skepticism about the pro-competitive effects of vertical mergers, companies considering these types of transactions should consult antitrust counsel early in the process to help assess and mitigate some of the risk areas with these transactions.

Article By Elizabeth A. N. Haas, Ian T. Hampton, and Kate E. Gehl of Foley & Lardner LLP

For more antitrust legal news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

Government Brings First Cryptocurrency Insider Trading Charges

In a series of parallel actions announced on July 21, 2022, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) initiated criminal and civil charges against three defendants in the first cryptocurrency insider trading case.

According to the criminal indictment, DOJ alleges that a former employee of a prominent cryptocurrency exchange used his position at the exchange to obtain confidential information about at least 25 future cryptocurrency listings, then tipped his brother and a friend who traded the digital assets in advance of the listing announcements, realizing gains of approximately $1.5 million. The indictment further alleges that the trio used various means to conceal their trading, and that one defendant attempted to flee the United States when their trading was discovered. The Government charged the three with wire fraud and wire fraud conspiracy. Notably, and like the Government’s recently announced case involving insider trading in nonfungible tokens, criminal prosecutors did not charge the defendants with securities or commodities fraud.

In its press release announcing the charges, US Attorney for the Southern District of New York Damian Williams said: “Today’s charges are a further reminder that Web3 is not a law-free zone. Just last month, I announced the first ever insider trading case involving NFTs, and today I announce the first ever insider trading case involving cryptocurrency markets. Our message with these charges is clear: fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street. And the Southern District of New York will continue to be relentless in bringing fraudsters to justice, wherever we may find them.”

Based on these facts, the SEC also announced charges against the three men in a civil complaint alleging securities fraud. In order to assert jurisdiction over the matter, the SEC alleges that at least nine of the cryptocurrencies involved in the alleged insider trading were securities, and the compliant traces through the Howey analysis for each. The SEC has not announced charges against the exchange itself, though in the past it has charged at least one cryptocurrency exchange that listed securities tokens for failure to register as a securities exchange. Perhaps coincidentally, on July 21 the exchange involved in the latest DOJ and SEC cases filed a rulemaking petition with the SEC urging it to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities.”

In an unusual move, Commissioner Caroline Pham of the Commodity Futures Trading Commission (CFTC) released a public statement criticizing the charges. Citing the Federalist Papers, Commissioner Pham described the cases as “a striking example of ‘regulation by enforcement.’” She noted that “the SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together.” Commissioner Pham continued, “Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input—through notice-and-comment rulemaking pursuant to the Administrative Procedure Act.” She concluded by stating that, “Regulatory clarity comes from being out in the open, not in the dark.” The CFTC is not directly involved in either case, and it is atypical for a regulator to chide a sister agency on an enforcement matter in this fashion. On the same day, another CFTC Commissioner, Kristin Johnson, issued her own carefully-worded statement that seemed to support the Government’s actions.

Article By Scott H. Kimpel of Hunton Andrews Kurth

For more criminal law and business crimes legal news, click here to visit the National Law Review.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

A Rule 37 Refresher – As Applied to a Ransomware Attack

Federal Rule of Civil Procedure 37(e) (“Rule 37”) was completely rewritten in the 2015 amendments.  Before the 2015 amendments, the standard was that a party could not generally be sanctioned for data loss as a result of the routine, good faith operation of its system. That rule didn’t really capture the reality of all of the potential scenarios related to data issues nor did it provide the requisite guidance to attorneys and parties.

The new rule added a dimension of reasonableness to preservation and a roadmap for analysis.  The first guidepost is whether the information should have been preserved. This rule is based upon the common law duty to preserve when litigation is likely. The next guidepost is whether the data loss resulted from a failure to take reasonable steps to preserve. The final guidepost is whether or not the lost data can be restored or replaced through additional discovery.  If there is data that should have been preserved, that was lost because of failure to preserve, and that can’t be replicated, then the court has two additional decisions to make: (1) was there prejudice to another party from the loss OR (2) was there an intent to deprive another party of the information.  If the former, the court may only impose measures “no greater than necessary” to cure the prejudice.  If the latter, the court may take a variety of extreme measures, including dismissal of the action. An important distinction was created in the rule between negligence and intention.

So how does a ransomware attack fit into the new analytical framework? A Special Master in MasterObjects, Inc. v. Amazon.com (U.S. Dist. Court, Northern District of California, March 13, 2022) analyzed Rule 37 in the context of a ransomware attack. MasterObjects was the victim of a well-documented ransomware attack, which precluded the companies access to data prior to 2016. The Special Master considered the declaration from MasterObjects which explained that, despite using state of the art cybersecurity protections, the firm was attacked by hackers in December 2020.  The hack rendered all the files/mailboxes inaccessible without a recovery key set by the attackers.  The hackers demanded a ransom and the company contacted the FBI.  Both the FBI and insurer advised them not to pay the ransom. Despite spending hundreds of hours attempting to restore the data, everything prior to 2016 was inaccessible.

Applying Rule 37, the Special Master stated that, at the outset, there is no evidence that any electronically stored information was “lost.”  The data still exists and, while access has been blocked, it can be accessed in the future if a key is provided or a technological work-around is discovered.

Even if a denial of access is construed to be a “loss,” the Special Master found no evidence in this record that the loss occurred because MasterObjects failed to take reasonable steps to preserve it. This step of the analysis, “failure to take reasonable steps to preserve,” is a “critical, basic element” to prove spoliation.

On the issue of prejudice, Amazon argued that “we can’t know what we don’t know” (related to missing documents).  The Special Master did not find Amazon’s argument persuasive. The Special Master concluded that Amazon’s argument cannot survive the adoption of Rule 37(e). “The rule requires affirmative proof of prejudice in the specific destruction at issue.”

Takeaways:

  1. If you are in a spoliation dispute, make sure you have the experts and evidence to prove or defend your case.

  2. When you are trying to prove spoliation, know the new test and apply it in your analysis (the Special Master noted that Amazon did not reference Rule 37 in its briefing).

  3. As a business owner, when it comes to cybersecurity, you must take reasonable and defensible efforts to protect your data.

Article By Gretchen E. Moore of Strassburger McKenna Gutnick & Gefsky

For more cybersecurity and media legal news, click here to visit the National Law Review.

©2022 Strassburger McKenna Gutnick & Gefsky

OSHA Proposes More Changes to Recordkeeping Rules

Employers across numerous industries may soon face additional recordkeeping and reporting obligations based on a new rule proposed by the Occupational Safety and Health Administration.

In March 2022, OSHA proposed amendment of its injury and illness tracking rule, which requires certain employers to file illness and injury data with the agency each year.  The tracking rule was first implemented in 2016, and required reporting of fatalities, hospitalizations, and other serious injuries for all covered employers with 250 or more employees, and for employers with 20-249 employees in certain “high hazard industries.” The rule required most covered employers to submit their Form 300A  “Summary of Work-Related Injuries and Illnesses” annually.  It also required certain employer establishments with 250 or more employees to submit their complete Form 300 Logs of Work-Related Injury and Illnesses, and their Form 301 Injury and Illness Incident reports annually.  Finally, the rule called for creation of a public database of employer illness/injury data, including business names and illness/injury locations.

The rule generated immediate objections from the business community based on privacy concerns.  Both the Form 300 Logs and the Form 301s Incident Reports contain personal employee information related to their health status.  Employers worried that if OSHA required broad disclosure of these documents and created a public database based on their content, it would jeopardize employee privacy. Even though OSHA claimed it would not make personal identifying information available, employers were not confident the agency could prevent inadvertent disclosure. Also, employers saw myriad ways in which the information could be used against them that have nothing to do with worker safety.

In response to this criticism and after a change in the presidential administration, OSHA rolled back the tracking rule in 2019. The 2019 Rule rescinded the requirement for employers of 250 or more employees to electronically submit Form 300s and Form 301s, but continued to require them to submit Form 300A summaries each year.  Because the summaries did not contain personal information, the modified rule alleviated employee privacy worries.

Now, OSHA is poised to revive the original tracking rule, but expand the application of the most onerous requirements to smaller establishments.  On March 30, 2022, OSHA published its proposed rule in the Federal Register.  If the final rule mirrors the proposed rule, it would largely restore the 2016 rule, but apply the Form 300 and 301 reporting requirements to covered establishments with 100 or more employees instead of 250 employees. Those employers covered by the new 100+ rule are limited to the industries in Appendix B of the proposed rule.  The list is lengthy and includes many farming, manufacturing and packaging industry employers, healthcare employers as well as grocery, department and furniture stores.

OSHA received public comment on the proposed rule through June 30, 2022.  OSHA received 83 comments from a mix of private and public entities, citizens, and industry groups.  OSHA will review the comments and employers should expect the agency to issue a Final Rule by the end of the calendar year, which would become effective 30 days after publication.

If OSHA enacts its proposed rule, covered employers will face significant additional burdens.  Employers must ensure that their Form 300 and 301 Forms are maintained accurately and filed in time to comply with the rule.  They can expect that OSHA will scrutinize these forms and potentially use them for inspection purposes or to develop industry-specific enforcement programs.  Moreover, OSHA may impose redaction burdens on employers and force them to remove personal identifying information from the forms before submission, which can be an administrative burden with potentially significant privacy implications if not followed carefully.  Finally, with additional data publicly available, employers should expect enhanced media and interest group activity based on their injury and illness data.  Even if personal information is not disclosed, interest groups and labor organizations will certainly seize on the available data to criticize employers or push for regulations, without consideration of the fact that employer fault cannot be determined from the data alone.

Employers should take steps now to prepare for the proposed rule and continue to ensure their safety and health programs minimize employee illness/injury risk.  The new rule would greatly increase potential legislative and public relations risks associated with poor safety and health outcomes, and effective illness/injury prevention programs can help employers avoid such scrutiny before the enhanced disclosure requirements take effect.

Article By Susan F. Wiltsie and Reilly C. Moore of Hunton Andrews Kurth. Scott W. Burton also contributed to this article.

For more labor and employment legal news, click here to visit the National Law Review.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

Implications of the Use of the Defense Production Act in the U.S. Supply Chain

What owners, operators and investors need to know before accepting funds under the DPA

There has been an expansion of regulations related to Foreign Direct Investment (FDI) in both the United States and abroad. Current economic and geopolitical tensions are driving further expansion of FDI in the U.S. and elsewhere.

Whether by intent or coincidence, the Foreign Investment Risk Review Modernization Act (FIRRMA) regulations that took effect February 13, 2020, included provisions that expanded the Committee on Foreign Investment in the U.S. (CFIUS) and FIRRMA based upon the invocation of the Defense Production Act (DPA) – such as with President Biden’s recent Executive Order evoking the DPA to help alleviate the U.S. shortage of baby formula.

As background, the U.S. regulation of foreign investment in the U.S. began in 1975 with the creation of CFIUS. The 2007 Foreign Investment and National Security Act refined CFIUS and broadened the definition of national security. Historically, CFIUS was limited to technology, industries and infrastructure directly involving national security. It was also a voluntary filing. Foreign investors began structuring investments to avoid national security reviews. As a result, FIRRMA, a CFIUS reform act, was signed into law in August 2018. FIRRMA’s regulations took effect in February 2020.

It is not surprising that there are national security implications to U.S. food production and supply, particularly based upon various shortages in the near past and projections of further shortages in the future. What is surprising is that the 2020 FIRRMA regulations provided for the application of CFIUS to food production (and medical supplies) based upon Executive Orders that bring such under the DPA.

The Impact of Presidential DPA Executive Orders

The 2020 FIRMMA regulations included an exhaustive list of “critical infrastructure” that fall within CFIUS’s jurisdiction. Appendix A to the regulations details “Covered Investment Critical Infrastructure and Functions Related to Covered Investment Critical Infrastructure” and includes the following language:

“manufacture any industrial resource other than commercially available off-the-shelf items …. or operate any industrial resource that is a facility, in each case, that has been funded, in whole or in part, by […] (a) Defense Production Act of 1950 Title III program …..”

Title III of the DPA “allows the President to provide economic incentives to secure domestic industrial capabilities essential to meet national defense and homeland security requirements.” This was arguably invoked by President Trump’s COVID-19 related DPA Executive Orders regarding medical supplies (such as PPEs, tests and ventilators, etc.) and now President Biden’s Executive Order related to baby formula (and other food production).

Based on the intent of FIRRMA to close gaps in prior CFIUS coverage, the FIRRMA definition of “covered transactions” includes the following language:

“(d) Any other transaction, transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent the application of section 721.”

Taken together, the foregoing provision potentially gives CFIUS jurisdiction to review non-U.S. investments in U.S. companies covered by DPA Executive Orders that are outside of traditional M&A structures. This means that even non-controlling foreign investments in U.S. companies (such as food or medical producers) who receive DPA funding are subject to CFIUS review. More significantly, such U.S. companies can be subject to CFIUS review for a period of 60 months following the receipt of any DPA funding.

As a result of DPA-related FDI implications, owners, operators, and investors should carefully assess the implications of accepting funding under the DPA and the resulting restrictions on non-U.S. investors in businesses and industries not historically within the jurisdiction of CFIUS.

Article By David Vance Lucas of Bradley Arant Boult Cummings LLP

For more administrative and regulatory legal news, click here to visit the National Law Review.

© 2022 Bradley Arant Boult Cummings LLP

EPA Will Propose to Ban Ongoing Uses of Asbestos

The U.S. Environmental Protection (EPA) announced on April 5, 2022, that it will propose to prohibit ongoing uses of chrysotile asbestos, the only known form of asbestos currently imported into the United States. EPA notes that the proposed rule will be “the first-ever risk management rule issued under the new process for evaluating and addressing the safety of existing chemicals under the Toxic Substances Control Act (TSCA) that was enacted in 2016.” EPA will propose to prohibit manufacture (including import), processing, distribution in commerce, and commercial use of chrysotile asbestos for all ongoing uses of chrysotile asbestos. EPA will also propose targeted disposal and recordkeeping requirements in line with industry standards, Occupational Safety and Health Administration (OSHA) requirements, and the Asbestos National Emission Standards for Hazardous Air Pollutants (NESHAP). EPA has posted a pre-publication version of the proposed rule. Publication of the proposed rule in the Federal Register will begin a 60-day comment period.

Background

As reported in our January 4, 2021, memorandum, EPA released on December 30, 2020, the final risk evaluation for asbestos, part 1: chrysotile asbestos (Asbestos RE Part 1). Of the six use categories evaluated (chlor-alkali diaphragms, sheet gaskets, other gaskets, oilfield brake blocks, aftermarket automotive brakes/linings, and other vehicle friction products), EPA found that there is unreasonable risk to workers, occupational non-users (ONU), consumers, and/or bystanders within each of the six chrysotile asbestos use categories. EPA found no unreasonable risk to the environment. According to the final risk evaluation, chrysotile is the prevailing form of asbestos currently mined worldwide, and “so it is assumed that a majority of commercially available products fabricated overseas that contain asbestos are made with chrysotile. Any asbestos being imported into the U.S. in articles is believed to be chrysotile.” The other five forms of asbestos are now subject to a significant new use rule (SNUR), as reported in our April 18, 2019, memorandum, “EPA Announces Final SNUR for Asbestos Will ‘Close Loophole and Protect Consumers.’”

Proposed Rule

EPA will propose a rule under TSCA Section 6(a) to prohibit manufacture (including import), processing, distribution in commerce, and commercial use of chrysotile asbestos in bulk or as part of chrysotile asbestos diaphragms used in the chlor-alkali industry and chrysotile asbestos-containing sheet gaskets used in chemical production. EPA will propose that these prohibitions take effect two years after the effective date of the final rule.

EPA will also propose pursuant to TSCA Section 6(a) to prohibit manufacture (including import), processing, distribution in commerce, and commercial use of chrysotile asbestos-containing brake blocks used in the oil industry, aftermarket automotive chrysotile asbestos-containing brakes/linings, other chrysotile asbestos-containing vehicle friction products (not including the National Aeronautics and Space Administration (NASA) Super Guppy Turbine aircraft use), and other chrysotile asbestos-containing gaskets. EPA will propose that these prohibitions take effect 180 days after the effective date of the final rule.

EPA will further propose pursuant to TSCA Section 6(a) to prohibit manufacture (including import), processing, and distribution in commerce of: aftermarket automotive chrysotile asbestos-containing brakes/linings for consumer use, and commercial use of other chrysotile asbestos-containing gaskets for consumer use. EPA will propose that these prohibitions take effect 180 days after the effective date of the final rule.

EPA will also propose disposal and recordkeeping requirements under which regulated parties would document compliance with certain proposed prohibitions. EPA states that it does not intend the proposed prohibitions on processing or distribution in commerce to prohibit any processing or distribution in commerce incidental to disposal of the chrysotile asbestos waste in accordance with the proposed requirements.

According to EPA, because a determination has been made that chrysotile asbestos presents an unreasonable risk to health within the United States or to the environment of the United States, pursuant to TSCA Section 12(a)(2), the proposed rule would apply to chrysotile asbestos even if being manufactured, processed, or distributed in commerce solely for export from the United States.

Commentary

Bergeson & Campbell, P.C. (B&C®) commends EPA on this historical achievement. Unsurprisingly, there are aspects of this precedent-setting proposed rule that invite discussion and warrant comment from affected parties. Key among these issues is a potential significant legal vulnerability in the underlying risk evaluation (i.e., Asbestos RE Part 1) for the proposed rule, an issue that may overshadow this historic achievement in a manner reminiscent of EPA’s failed ban of asbestos in 1991 (Corrosion Proof Fittings v. EPA, 947 F.2d 1201 (5th Cir., 1991)).

EPA proposed that the prohibition on specific conditions of use (e.g., chrysotile asbestos diaphragms used in the chlor-alkali industry) would take effect two years after the effective date of the final rule. EPA stated that it “believes an aggressive transition away from chrysotile asbestos will spur adoption of superior technology [e.g., membrane cells with increased concentrations of per- and polyfluoroalkyl substances (PFAS)].” The clear need to consider EPA’s intended action on asbestos in the context of its ongoing actions on PFAS is of course not lost on the Agency. EPA acknowledged that “the transition away from asbestos-containing diaphragms could result in greater usage and release of PFAS.”

B&C notes that innovative new technologies, such as alternative membrane cells, may be available in the future, but those technologies must be proven to be economically and technically viable. Once proven effective, the underlying chemical substances must be reviewed as new chemicals if so classified under TSCA. The development, review, and approval are all on indeterminate timelines, so it is speculative when novel, non-PFAS-based technologies will be commercially available and, of course, whether that time will be prior to the effective date of EPA’s proposed ban on asbestos.

EPA requested comment on specific aspects of the proposed rule that B&C encourages potentially impacted parties to consider. For example, EPA discussed its authority under TSCA Section 6(g) to grant a time-limited exemption for a specific condition of use, such as the chlor-alkali industry, where EPA finds “that compliance with the proposed requirement would significantly disrupt the national economy, national security, or critical infrastructure.”

EPA also requested comment on a primary alternative regulatory option that EPA discussed for the chlor-alkali diaphragm and sheet gasket categories that would allow a prohibition to take effect five years after the effective date of the final rule. As part of this option, EPA would include establishment of a risk-based performance standard known as an existing chemical exposure limit (ECEL). EPA developed an eight-hour time-weighted average (8-hr TWA) ECEL of 0.005 fibers/cubic centimeter (f/cc) for inhalation exposures to chrysotile asbestos as an eight-hr TWA ECEL-action level of 0.0025 f/cc, with associated requirements for initial and periodic monitoring and respirator usage/type if exceedances are found.

As part of the monitoring requirements, EPA stated that it would “require use of appropriate sampling and analytical methods to determine asbestos exposure, including: … Compliance with the Good Laboratory Practice Standards at 40 CFR Part 792,” despite the fact that EPA acknowledges that other standards, such as Industrial Hygiene Laboratory Accreditation Program (IHLAP), are more appropriate for industrial hygiene monitoring. EPA’s TSCA Section 5(e) order template states the following under Section III.D:

Compliance with TSCA GLPS, however, is not required under this New Chemical Exposure Limit Section where the analytical method is verified by a laboratory accredited by either: the American Industrial Hygiene Association (“AIHA”) Industrial Hygiene Laboratory Accreditation Program (“IHLAP”) or another comparable program approved in advance in writing by EPA.

EPA devoted one paragraph in the proposed rule to “TSCA section 26(h) considerations.” EPA stated, in part, that its unreasonable risk determination “was based on a risk evaluation, which was subject to peer review and public comment, was developed in a manner consistent with the best available science and based on the weight of the scientific evidence as required by TSCA sections 26(h) [and 26(i)] and 40 CFR 702.43 and 702.45.”

B&C notes that EPA stated in the Asbestos RE Part 1 the following:

TSCA § 26(h) and (i) require EPA, when conducting Risk Evaluations, to use scientific information, technical procedures, measures, methods, protocols, methodologies and models consistent with the best available science and base its decisions on the weight of the scientific evidence. To meet these TSCA § 26 science standards, EPA used the TSCA systematic review process described in the [2018] Application of Systematic Review in TSCA Risk Evaluations document [citation omitted] [2018 SR Document].

Prior to completing Asbestos RE Part 1, EPA requested the National Academies of Science, Engineering, and Medicine (NASEM) to review the 2018 SR Document. In February 2021, NASEM released its consensus study report on EPA’s 2018 SR Document and concluded that it did not meet the criteria of “comprehensive, workable, objective, and transparent” and that “The OPPT approach to systematic review does not adequately meet the state-of-practice.”

NASEM recommended that “With regard to hazard assessment for human and ecological receptors, OPPT should step back from the approach that it has taken and consider components of the OHAT, IRIS, and Navigation Guide methods that could be incorporated directly and specifically into hazard assessment.”

In response to the NASEM review, EPA revised its systematic review method. On December 20, 2021, EPA released the “Draft Systematic Review Protocol Supporting TSCA Risk Evaluations for Chemical Substances” (2021 Draft Protocol) for public comment. EPA acknowledged in the 2021 Draft Protocol that:

Previously [in the 2018 SR Document], EPA did not have a complete clear and documented TSCA systematic review (SR) Protocol. EPA is addressing this lack of a priori protocol by releasing [the 2021 Draft Protocol].

EPA further stated that the:

[2021 Draft Protocol] is significantly different [from the 2018 SR Document] in that it includes descrition [sic] of the Evidence Integration process…, which was not previously included in the [2018 SR Document].

B&C recognizes that the scientific methods used to inform systematic review are not static and that updates will be required as the science evolves. In this instance, however, many of the documents cited as supporting information for updating the 2021 Draft Protocol (e.g., Office of Health Assessment and Translation (OHAT), 2015) were available prior to EPA issuing the 2018 SR Document. Rather than utilizing these documents at the time, EPA developed the 2018 SR Document de novo. In other words, EPA chose to develop its own methodology in 2018 rather than incorporating and adapting existing methodologies that represented the best available science at the time.

These issues raise interesting procedural questions and issues around whether EPA demonstrated that Asbestos RE Part 1 was based on the best available science and weight of scientific evidence, as required under TSCA Sections 26(h) and 26(i) and the implementing regulation under 40 C.F.R. Part 702.

B&C encourages stakeholders to review EPA’s proposed risk management rule on chrysotile asbestos, even for entities that do not manufacture, process, distribute, or use this substance. We urge this review because of the precedential nature of EPA’s decisions. B&C also encourages interested parties to provide public comments on the proposed rule, given that risk management decisions in the proposed rule will likely serve as a basis from which EPA regulates other chemical substances EPA is evaluating under TSCA Section 6.

Article By: the Government Regulation practice at Bergeson & Campbell, P.C.

For more environmental legal news, click here to visit the National Law Review.

©2022 Bergeson & Campbell, P.C.

Better Late than Never, Just About – UK Government Issues Workplace Guidance on Living with COVID

So with Covid 19 now officially behind us for all purposes (except actual reality, obviously), we have now been graced by the Government’s new “Living with Covid” guidance.  This was due to come into force on 1 April and was released fashionably late in the afternoon on, well, 1st April.  You could say with some justification that this did not give employers much time to prepare, but that is OK because on close review of the guidance there is in fact very little to prepare for.  As a steer to businesses, this is little short of directionless.

First, it makes the obvious point that the abolition of the requirement to give covid express consideration in workplace risk assessments does not take away any of the employer’s obligations to continue to comply with its health & safety, employment and equality duties (in the latter two cases, although unsaid, presumably as they may be affected by the former).

From there, the Government moves to normalise covid through a long list of symptoms common to it, colds, flu and other respiratory diseases – fair enough so far – but also to other quite unrelated conditions such as hangovers, migraines, food poisoning, being unfit, malaria and frankly just getting old (“unexplained tiredness, lack of energy”).  The list is significantly expanded from the traditional trio of continuous cough, fever, loss of taste and smell and now also includes muscle pain, diarrhoea, headache, loss of appetite and “feeling sick” (what, really?). Some medical practitioners say that this is long overdue recognition of all the things covid can do to you. However, it is still a wincingly unhappy expansion for employers, since the published list now essentially includes something from pretty much every ailment known to man. The guidance notes that it will not usually be possible to tell whether you have covid or something else from the symptoms alone and of course the free testing by which that could have been determined in the past is now largely withdrawn.  Therefore the guidance to individuals is that “if you have symptoms of a respiratory infection such as covid and you have a high temperature or you do not feel well enough to go to work, you are advised to try to stay at home and avoid contact with other people” and then “Try to work from home if you can.  If you are unable to work from home you should talk to your employer about options available to you”.  Given the rich panoply of symptoms now available to the discerning malingerer, justifying taking yourself home for five days while you work out whether your headache is covid or just a headache has never been so easy.

As a result, the burden is shifted squarely to employers to keep up the anti-covid fight, and in particular to decide whether to maintain restrictions on entry to their premises for those who are unvaccinated and/or untested.  Both will be increasingly difficult to sustain in view of the obvious official indifference to the question evidenced by the guidance, which focuses instead on the traditional measures of ventilation, regular cleaning of high-touch surfaces, provision of sanitiser and hygiene advice, etc. The other big hole in the guidance is as to the employer’s rights (or is it obligation?) to send someone home if they have one or more of that long list of potentially relevant symptoms, and even if the employee himself feels able to work and/or cannot work from home.  Nor does it deal with the employees’ sick pay rights in those cases.

Taking a reasonably hawkish view of those two questions:-

  1. If you know that the employee has symptoms which could well indicate that he is suffering from covid, and even if it could equally be something less serious, are you complying with your Health & Safety at Work Act duty to take all reasonably practicable steps to maintain a safe system of work if you allow him in anyway?  If he works in a sparsely –occupied well-ventilated area, perhaps yes, but otherwise probably not.  Given the virulence of Omicron, it is unarguably foreseeable that allowing someone who may have it to breathe wantonly on other people may lead to their contracting it too.  It is also clearly foreseeable, if no longer as much so as with the earlier covid variants, that those other people may become properly ill or die as a result.  Put mathematically, breach of duty + foreseeable risk of injury + causation + actual injury = liability.

So in my view, despite the vacuum in the new guidance, an employer not just can, but really should send home immediately an employee with any material case of the symptoms listed, as a minimum until it becomes clear that the real issue is something else (though not malaria – best not let them in either).

A firm stance on this will also help combat reluctance to return to the office among those staff concerned about the health risk of doing so.  If they or their cohabitants are particularly vulnerable, the knowledge that basically no precautions are being taken to ensure that those present in the workplace are all covid-free will only feed those anxieties.

  1. If the employee is sent home on these grounds and cannot work there, will he be entitled to full salary (as it was not by his choice) or sick pay only?  In many cases he will be back within a week and the two may be the same.  Where they are not, however, I believe that it would strictly be sick pay only – though the employee may himself be physically able to work, he is practically unable to do so by reason of his own possible medical condition, the risk it may pose to others in the workplace and the duty of the employer to take reasonable steps to head off that risk.  That said, there are employment relations arguments both ways on this – on the one hand, that the symptoms listed are so varied and transient that they represent an easy avenue for abuse, and on the other that if reporting them means you get packed off home on reduced pay (perhaps none until SSP kicks in on day 4), you are much less likely to report them in the first place and will probably prefer to pass your day posing an undeclared but potentially quite serious risk to your colleagues.

Article By David Whincup of Squire Patton Boggs (US) LLP

For more coronavirus legal news, click here to visit the National Law Review.

© Copyright 2022 Squire Patton Boggs (US) LLP

Surprise! The No Surprises Act Changes Again

The No Surprises Act (Act), which became effective Jan. 1, 2022, is the latest health care law passed with the best of intent: to create consumer protection from unexpected out-of-network medical bills and to create a federal independent dispute resolution (IDR) process to resolve payment disputes between payers and out-of-network providers. Unfortunately, the Act, especially the U.S. Department of Health and Human Services’ (HHS) implementation of the IDR process, also creates a new administrative burden for health care providers. Providers and medical associations filed lawsuits in multiple jurisdictions to challenge HHS’ implementation of the IDR process and the constitutionality of the Act before it was even in effect.

On Feb. 24, 2022, the United States District Court for the Eastern District of Texas granted the Texas Medical Association’s Motion for Summary Judgement to vacate select IDR requirements. The Court found that HHS’ interim final rule’s IDR process, intended to resolve payment disputes regarding reimbursement for out-of-network emergency services and out-of-network services provided at in-network facilities, was contrary to the clear language of the Act[1] (Rule).

In general, the Act[2] requires health insurance payers (Insurers) to reimburse providers for certain out-of-network services at a statutorily calculated “out-of-network rate.”[3] Where an All-Payer Model Agreement or specified state law does not exist, to set such a rate, an Insurer must issue an initial out-of-network rate decision and pay such amount to the providers within 30 days after the out-of-network claim is submitted.[4] If the provider disagrees with the Insurer’s proposed out-of-network reimbursement rate, the provider has a 30-day window to negotiate a different payment rate with the Insurer.[5] If these negotiations fail, the parties can proceed to the IDR process.[6]

Congress adopted a baseball-style arbitration model for the Act’s IDR process. The Insurer and provider each submit a proposed out-of-network rate with limited supporting evidence. The arbitrator picks one of the offers while taking into account specified considerations, including the “qualified payment amount,” the provider’s training, experience, quality, and outcomes measurements, the provider’s market share, the patient’s acuity, the provider’s teaching status, case mix, and scope of services, and the provider’s/Insurer’s good-faith attempts to enter into a network agreement.[7] The “qualifying payment amount” (QPA), is designed to represent the median rate the Insurer would pay for the item or service if it were provided by an in-network provider.[8]

The Rule requires the IDR arbitrator to select the proposed payment amount that is closest to the QPA unless “the certified IDR entity [arbitrator] determines that credible information submitted by either party … clearly demonstrates that the [QPA] is materially different[9] from the appropriate out-of-network rate.”[10] This is a clear departure from the analysis set forth in the Act.

The Texas Medical Association challenged the Rule under the Administrative Procedures Act (APA), arguing that the Departments exceeded their authority by giving “outsized weight” to one statutory factor over the others specified by Congress, and that the Departments failed to comply with the APA’s notice and comments requirements in promulgating the Rule. In turn, the Departments argued that the plaintiffs did not have standing to bring the claims.

After dispensing with defendant’s standing arguments, the Eastern District of Texas Court ruled in favor of the plaintiff’s Motion for Summary Judgment and determined that “the Act unambiguously establishes the framework for deciding payment disputes and concludes that the Rule conflicts with the statutory text.” Under the Act, the arbitrators (or certified IDR entities) “shall consider … the qualifying payment amounts” and the provider’s level of training, experience, and quality outcomes, the market share held by the provider, the patient’s acuity, the provider’s teaching status, case mix, and scope of services, and the demonstrated good faith efforts of both parties in entering into a network agreement.”[11] The Act did not specify that any one factor should be considered the “primary” or “most important” factor. The Rule, in contrast, requires arbitrators to “select the offer closest to the [QPA]” unless “credible” information, including information supporting the “additional factors,” “clearly demonstrates that the [QPA] is materially different from the appropriate out-of-network rate.”[12] The Departments characterized the other factors as “permissible additional factors” that may be considered only when appropriate.[13] The Court found that the Department’s Rule was inconsistent with the Act and that since Congress had spoken clearly on the factors to be considered in the arbitration process, the Department’s interpretation of the Act was not appropriate and had exceeded the Department’s authority.[14]

Following the Court’s decision, the Departments issued a memorandum on Feb. 28, 2022, clarifying the Act’s requirements for providers and Insurers. The memo specifically noted that the Court’s decision would not, in their opinion, affect the patient-provider dispute resolution process.[15] The Departments also stated they would withdraw any guidance inconsistent with the Court’s Opinion, provide additional training for interested parties, and keep the IDR process portal open to resolve disputes. The Departments also will be considering further rulemaking to address the IDR process.

The No Surprises Act continues to surprise us all with more adaptations. Enforcement of this new law remains uncertain in light of the numerous legal challenges, including at least one constitutionality challenge.

[1] Requirements Related to Surprise Billing: Part II, 86 Fed. Reg. 55,980 (Oct. 7, 2021).

[2] Consolidated Appropriations Act of 2021, Pub. L. No. 116-260, div. BB, tit. I, 134 Stat. 1182, 2758-2890 (2020).

[3] 300gg-111(a)(1)(C)(iv)(II) and (b)(1)(D).

[4] 300gg-111(a)(1)(C)(iv) and (b)(1)(C).

[5] 300gg-111(c)(1)(A).

[6] 300gg-111(c)(1)(B).

[7] 300gg-111(c)(5).

[8] 300gg-111(a)(3)(E)(i)(I)-(II).

[9] “Material difference” is defined as “a substantial likelihood that a reasonable person with the training and qualifications of a certified IDR entity making a payment determination would consider the submitted information significant in determining the out-of-network rate and would view the information as showing that the [QPA] is not the appropriate out-of-network rate. 149.510(a)(2)(viii).

[10] 45 C.F.R. 149.510(c)(4)(ii).

[11] 300gg-111(c)(5)(C)(i)-(ii).

[12] 45 C.F.R. 149.510(c)(4)(ii)(A).

[13] 86 Fed. Reg. 56,080.

[14] Because the Departments had exceeded their statutory authority, no Chevron deference was owed to their regulations. Chevron U.S.A. v. Natural Resources Defense Council, Inc., 468 U.S. 837 (1984).

[15] This is a separate dispute resolution process designed to address disputes between patients and providers when bills for uninsured and self-pay patients are inconsistent with the good faith estimate provided by the health care provider.

Article By Stacey A. Borowicz and Joseph D. Wheeler of Dinsmore & Shohl LLP

For more healthcare legal news, click here to visit the National Law Review.

© 2022 Dinsmore & Shohl LLP. All rights reserved.

The Gensler SEC: What to Expect in 2022

Since Gary Gensler became chair of the U.S. Securities and Exchange Commission in April 2021, his agency has signaled an active agenda that many expect will be aggressively enforced. Cornerstone Research recently brought together distinguished experts with SEC experience to share what they expect the SEC will focus on in 2022. The expert forum, “The Gensler SEC: Policy, Progress, and Problems,” featured Joseph Grundfest, a former commissioner of the SEC and currently serving as the W. A. Franke Professor of Law and Business at Stanford Law School; and Mary Jo White, senior chair, litigation partner, and leader of Debevoise & Plimpton’s Strategic Crisis Response and Solutions Group who previously served as chair of the SEC and as U.S. Attorney for the Southern District of New York. Moderated by Jennifer Marietta-Westberg of Cornerstone Research, the forum was held before an audience of attorneys and economists and explored the major regulatory and enforcement themes expected to take center stage in the coming year.

ESG Disclosures and Materiality

In its Unified Regulatory Agenda first released in June of last year, the SEC indicated that it will propose disclosure requirements in the environmental, social, and governance (ESG) space, particularly on climate-related risks and human capital management. However, as documented by the numerous comments received as a result of the SEC’s March 15, 2021, request for input on climate change disclosures, there is substantial debate as to whether these disclosures must, or should, require disclosure only of material information. During the expert forum, Grundfest and White agreed that ESG disclosures should call for material information only. However, they have different predictions on whether ESG disclosures actually will be qualified by a materiality requirement.

White emphasized that materiality is a legal touchstone in securities laws. “If the SEC strays far from materiality, the risk is that a rule gets overturned,” she said. “Not every single rule needs to satisfy the materiality requirement, but it would be a mistake for the SEC not to explain what its basis for materiality is in this space.”

Grundfest added, “There is a spectrum of ESG issues, and while some are within the SEC’s traditional purview, others are new and further away from it. For example, to better ensure robust greenhouse emissions disclosure, the Environmental Protection Agency should be the one to require disclosure rules that would not be overturned.”

Gensler has indicated that investors want ESG disclosures in order to make investment and voting decisions. For instance, in his remarks before the Principles for Responsible Investment in July 2021, Gensler stated that “[i]nvestors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs.” White predicts that some but not all ESG disclosure requirements in the proposed rules the SEC is working on will call for material information.

Grundfest, however, believes that the rules the SEC eventually adopts will require disclosure only of material information. “The SEC’s proposal on ESG disclosures will ask for everything, from the moon to the stars,” he said. “But public comments will sober the rules. The SEC staff will take into account the Supreme Court standard and the Chevron risk. It will settle on adopting materiality-based disclosure rules.”

There is also debate over the potential definition of materiality in the context of any proposed ESG disclosures. The panelists were asked whether the fact that large institutional investors assert various forms of ESG information are important to their investment decisions is a sufficient basis upon which to conclude that the information is material. Neither White nor Grundfest believes the Supreme Court as currently composed would accept this argument, but they differ on the reasons.

Grundfest believes the Supreme Court will stick with its approach of a hypothetical reasonable investor. “The fact that these institutional investors ask for this information doesn’t necessarily mean that it’s material,” he said. “If the SEC wants to have something done in this space, it has to work within the law.”

White said an important aspect of the rule will be the economic analysis, though she, too, does not think materiality can be “decided by an opinion poll among institutional investors.” For example, a shareholder proposal requesting certain information that has not received support does not necessarily make the information immaterial. “The Supreme Court will be tough on the survey approach,” she said.

Digital Assets and Crypto Exchanges

In several statements and testimonies, Gensler has declared the need for robust enforcement and better investor protection in the markets for digital currencies. He has publicly called the cryptocurrency space “a Wild West.” In addition to bringing enforcement actions against token issuers and other market participants on the theory that the tokens constitute securities, the SEC under his leadership has brought enforcement actions against at least one unregistered digital asset exchange on the theory that the exchange traded securities and should therefore register as securities exchange.

“The crypto space is the SEC’s most problematic area,” Grundfest said. “Franz Kafka’s most famous novel is The Trial. It’s about a person arrested and prosecuted for a crime that is never explained based on evidence that he never sees. Some recent SEC enforcement proceedings make me wonder whether Kafka is actually still alive and well, and working deep in the bowels of the SEC’s Enforcement Division.” In support of this literary reference, Professor Grundfest  noted that, in bringing enforcement actions against crypto exchanges alleging that they traded tokens that were unregistered securities, the SEC never specified which tokens traded on these exchanges were securities. “This is almost beyond regulation by enforcement. It’s regulation by FUD—fear, uncertainty, and doubt,” Grundfest said.

White predicted that, of the 311 active crypto exchanges listed by CoinMarketCap as of December 1, 2021, the SEC will bring cases against at least four in the coming year.

Gensler has publicly argued for bringing the cryptocurrency-related industry under his agency’s oversight. “We need additional congressional authorities to prevent transactions, products, and platforms from falling between regulatory cracks,” he said in August at the Aspen Security Forum. But neither White nor Grundfest believes the current Congress will enact legislation giving the SEC authority to regulate crypto transactions that do not meet the definition of an investment contract under the Howey test.

In November 2021, a federal jury in Audet v. Fraser at the District Court of Connecticut decided that certain cryptocurrency products that investors purchased were not securities under Howey. Neither Grundfest nor White believes this finding will cause the SEC to become more cautious about asserting that some forms of crypto are securities.

“One jury verdict is hardly a precedent,” White said. “The facts of the case didn’t have many of the nuances under Howey that other cases have. It will not deter the SEC.”

The panelists agreed that SEC enforcement activity will be aggressive in the crypto space. A report by Cornerstone Research, titled SEC Cryptocurrency Enforcement: 2021 Update, found that, under the new administration, the SEC has continued its role as one of the main regulators in the cryptocurrency space. In 2021, the SEC brought 20 enforcement actions against digital asset market participants, including first-of-their-kind actions against a crypto lending platform, an unregistered digital asset exchange, and a decentralized finance (DeFi) lender.

Proxy Voting

With the 2022 proxy season on the horizon, people will be watching the SEC closely, as Gensler’s Commission recently adopted new rules for universal proxy cards, and it has revisited amendments adopted under the former chair of the SEC, Jay Clayton.

Last November, the SEC adopted universal proxy rules that now allow shareholders to vote for their preferred mix of board candidates in contested elections, similar to voting in person.  These rules would put investors voting in person and by proxy on equal footing. “Universal proxy was proposed at the time when I was the chair of the SEC, and the logic for the rule is overpowering,” White said. “In adoption, some commissioners had reservations on the thresholds of voting power a dissident would be required to solicit, but voted in favor anyway based on its logic. It was a 4 to 1 vote.”

Grundfest and White expect the number of proxy contests that proceed to a vote will go up as a result. From 2019 to 2020, the incidence of proxy contests increased from 6 to 13. Looking ahead to the coming year, Grundfest predicts the rule change will increase the incidence of proxy contests by somewhere between 50% and 100%. White predicts a more modest increase of about 50%.

Regarding rules on proxy voting advice, the SEC issued Staff Legal Bulletin No. 14L (CF) last November to address Rule 14a-8(i)(7), which permits exclusion of a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.”

The bulletin puts forth a new Staff position that now denies no-action relief to registrants seeking to exclude shareholder proposals that transcend the company’s day-to-day business matters. “This exception is essential for preserving shareholders’ right to bring important issues before other shareholders by means of the company’s proxy statement, while also recognizing the board’s authority over most day-to-day business matters,” the bulletin said.

Both White and Grundfest believe a modest number of issuers will go to court in the 2022 proxy season seeking to exclude Rule 14a-8 shareholder proposals as “transcending” day-to-day operations. “I think companies will challenge shareholder proposals in court but not a lot,” White said. “It depends on the shareholder proposal.”

Grundfest believes any such cases would be driven as much by CEOs as by any other factor. “Companies may challenge a shareholder proposal in court if they have a CEO who is offended by a certain proposal or for First Amendment reasons,” he said. Grundfest cited a hypothetical example of a software company in Texas with a shareholder proposal on gun rights or abortion rights, which have nothing to do with the cybersecurity software the company produces. “It would be hard to force a company to put forth a politically charged proposal that is not related to that company’s business,” he said. “If it’s a First Amendment right, the company will go to court.”

Article By Jennifer Marietta-Westberg and Simona Mola of Cornerstone Research

For more SEC and securities legal news, click here to visit the National Law Review.

Copyright ©2022 Cornerstone Research

EV Buses: Arriving Now and Here to Stay

In the words of Miss Frizzle, “Okay bus—do your stuff!”1 A favorable regulatory environment, direct subsidy, private investment, and customer demand are driving an acceleration in electric vehicle (EV) bus adoption and the lane of busiest traffic is filling with school buses. The United States has over 480,000 school buses, but currently, less than one percent are EVs. Industry watchers expect that EV buses will eventually become the leading mode for student transportation. School districts and municipalities are embracing EV buses because they are perceived as cleaner, requiring less maintenance, and predicted to operate more reliably than current fossil fuel consuming alternatives. EV bus technology has improved in recent years, with today’s models performing better in cold weather than their predecessors, with increased ranges on a single charge, and requiring very little special training for drivers.2 Moreover, EV buses can serve as components in micro-grid developments (more on that in a future post).

The Investment Incline

Even if the expected operational advantages of EV buses deliver, the upfront cost to purchase vehicles or to retrofit existing fleets remains an obstacle to expansion.  New EV buses price out significantly more than traditional diesel buses and also require accompanying new infrastructure, such as charging stations.  Retrofitting drive systems in existing buses comparatively reduces some of that cost, but also requires significant investment.3

To detour around these financial obstacles, federal, state, and local governments have made funding available to encourage the transition to EV buses.4 In addition to such policy-based subsidies, private investment from both financial and strategic quarters has increased.  Market participants who take advantage of such funding earlier than their competitors have a forward seat to position themselves as leaders.

You kids pipe down back there, I’ve got my eyes on a pile of cash up ahead!

Government funding incentives for electrification are available for new EV buses and for repowering existing vehicles.5 Notably, the Infrastructure Investment and Jobs Act committed $5 billion over five years to replace existing diesel buses with EV buses. Additionally, the Diesel Emissions Reduction Act provided $18.7 million in rebates for fiscal year 2021 through an ongoing program.

In 2021, New York City announced its commitment to transition school buses to electric by 2035.  Toward that goal, the New York Truck Voucher Incentive Program provides vouchers to eligible fleets towards electric conversions and covers up to 80% of those associated costs.6  California’s School Bus Replacement Program had already set aside over $94 million, available to districts, counties, and joint power authorities, to support replacing diesel buses with EVs, and the state’s proposed budget for 2022-23 includes a $1.5 billion grant program to support purchase of EV buses and charging stations.

While substantial growth in EV bus sales will continue in the years ahead, it will be important to keep an eye out for renewal, increase or sunset of these significant subsidies.

Market Players and Market Trends, OEMs, and Retrofitters

The U.S is a leader in EV school bus production:  two of the largest manufacturers, Blue Bird and Thomas Built (part of Daimler Truck North America), are located domestically, and Lion Electric (based in Canada) expects to begin delivering vehicles from a large facility in northern Illinois during the second half of 2022.  GM has teamed up with Lighting eMotors on a medium duty truck platform project that includes models prominent in many fleets, and Ford’s Super Duty lines of vehicles (which provide the platform for numerous vans and shuttle vehicles) pop up in its promotion of a broader electric future. Navistar’s IC Bus now features an electric version of its flagship CE series.

Additionally, companies are looking to a turn-key approach to deliver complete energy ecosystems, encompassing vehicles, charging infrastructure, financing, operations, maintenance, and energy optimization. In 2021, Highland Electric Transportation raised $253 million from Vision Ridge Partners, Fontinalis Partners (co-founded by Bill Ford) and existing investors to help accelerate its growth, premised on a turn-key fleet approach.7

Retrofitting is also on the move.  SEA Electric (SEA), a provider of electric commercial vehicles, recently partnered with Midwest Transit Equipment (MTE) to convert 10,000 existing school buses to EVs over the next five years.8 MTE will provide the frame for the school uses and SEA will provide its SEA-drive propulsion system to convert the buses to EV.9 In a major local project, Logan Bus Company announced its collaboration with AMPLY Power and Unique Electric Solutions (UES) to deploy New York City’s first Type-C (conventional) school bus.10

Industry followers should expect further collaborations, because simplifying the route to adopting an EV fleet makes it more likely EV products will reach customers.

Opportunities Going Forward

Over the long haul, EV buses should do well. Scaling up investments and competition on the production side should facilitate making fleet modernization more affordable for school districts while supporting profit margins for manufacturers. EVs aren’t leaving town, so manufacturers, fleet operators, school districts and municipalities will either get on board or risk being left at the curb.

Article By Michael J. Small and Samantha Ruppenthal at Foley & Lardner LLP

For more utilities and transportation legal news, click here to visit the National Law Review.

 

 

1https://shop.scholastic.com/parent-ecommerce/series-and-characters/magic-school-bus.html

2https://www.busboss.com/blog/having-an-electric-school-bus-fleet-is-easier-than-many-people-think

3https://thehill.com/opinion/energy-environment/570326-electric-school-bus-investments-could-drive-us-vehicle

4https://info.burnsmcd.com/white-paper/electrifying-the-nations-mass-transit-bus-fleets

5https://stnonline.com/partner-updates/electric-repower-the-cheaper-faster-and-easier-path-to-electric-buses/

6https://www1.nyc.gov/office-of-the-mayor/news/296-21/recovery-all-us-mayor-de-blasio-commits-100-electric-school-bus-fleet-2035

7https://www.bloomberg.com/press-releases/2021-02-16/highland-electric-transportation-raises-253-million-from-vision-ridge-partners-fontinalis-partners-and-existing-investors

8https://www.electrive.com/2021/12/07/sea-electric-to-convert-10k-us-school-buses/#:~:text=SEA%20Electric%20and%20Midwest%20Transit,become%20purely%20electric%20school%20buses.

9 Id.

10https://stnonline.com/news/new-york-city-deploys-first-type-c-electric-school-bus/

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