Tag: hospitality

Food for Thought: Serving Up Unique Concerns for Restaurant Leases

Many aspects of commercial leasing are complex, but restaurant leases are a unique species of lease. Counsel to restaurants must be cognizant of operational and logistical issues posed by these hospitality businesses, and be prepared to address these key issues to protect the restaurant. Here are some of the most distinctive issues to be aware of when representing a restaurant tenant:

CONSTRUCTION ISSUES

Restaurant construction is different from other tenants’ fit-out work. It involves several moving parts, all of which come together to facilitate the restaurant’s successful operation. These include utilities, heating, ventilation, and air conditioning, managing odors, grease traps, hot water, and fire suppression systems. While counsel need not have the knowledge of a contractor or architect, one must understand the importance of the size of HVAC systems, design of fire suppression and sprinkler systems, the capacity and location of electrical conduit and electrical service, and sanitary and sewer lines and gas lines. For example, grease traps are imperative for restaurants, and it is important to determine (i) whether a grease trap is separate and external, or shared with other tenants, (ii) if shared, how maintenance responsibility and cost will be allocated among the shared users; and (iii) whether the grease trap’s location is convenient for operations.

Mitigation of cooking odors is another key issue, especially in a mixed-use development, shopping center, or an urban residential neighborhood. Some landlords and municipalities require expensive odor control systems, and negotiation is important in determining the size and scope of such measures, especially given the subjective perception of odors generally. It may also be helpful to include an objective standard of negative pressure for odor control. Noise mitigation is likewise an issue as to which landlords may be sensitive. Restaurants draw crowds of people who are out to enjoy themselves, which leads to loud voices, music, and other noise that emanates from the restaurant in a way that may affect other abutters and neighbors, especially residences or hotels.

OPERATIONAL ISSUES

  1. Hours of Operation: All businesses are sensitive to their hours or operation, but it is particularly important for restaurants to understand the impacts that may come with later hours, which often cause landlords concern (especially if the restaurant serves alcohol). If the restaurant has outdoor seating or a patio area, are those hours the same as for the interior space? Some liquor licenses or municipal regulations may also restrict operations, so it is important to understand and comply with the requirements and rules of governing bodies.
  2. Deliveries: Restaurants receive multiple deliveries daily, often greater than other types of businesses. The logistics of delivering food to the restaurant are critically important. Sometimes landlords desire to limit the hours during which deliveries may be made or the loading docks (if any) that may be used. Counsel should know how deliveries will be made and determine whether any restrictions on same will be troublesome to the restaurant’s operations.
  3. Trash: Restaurants generate a substantial amount of trash, both wet and dry, food and nonfood. The location and adequacy of trash storage as well as the frequency of removal are key issues to specify in the lease. Some landlords also require a cold storage area for food waste; and of course care should be taken to avoid vermin infestations. Where will the tenant need to take its trash? If the common trash room is far from the kitchen, that may pose problems for restaurant staff.
  4. Parking: Vehicle parking is an issue for all tenants, but it is often magnified for restaurants. Counsel should understand where the restaurant’s patrons are expected to park, and if desired seek to negotiate designated takeout parking spaces for the restaurant. If there is to be valet parking, or if a development designates certain areas as approved for ride share drop-off and pick-up and not others, counsel should understand whether those services and areas pose a business risk for the client.

EXCLUSIVE ISSUES

Many types of retail businesses seek exclusives in leases, but restaurants are particularly invested in ensuring that landlords do not lease other space to a competitor restaurant. If the development contains a hotel, the restaurant lease should contain an exclusive which prevents the hotel from operating a similar restaurant.

TIMING ISSUES

If the restaurant is located in a mixed-use project or shopping center, or otherwise not on its own parcel, the restaurant will want to negotiate the ability to determine when construction occurs and when it is obligated to open for business. Timing of construction can be a big risk, as delays and interruptions are expensive and set back the opening. Aside from construction timing, opening requirements may be important, especially in light of whether other tenants in the project are open and operating. Restaurant counsel may seek an opening co-tenancy requirement such that the restaurant will not be obligated to open until the major tenant or a substantial portion of the development is also open.

In summary, restaurant leases are more complicated than other retail leasing; and restaurant counsel should be aware of these unique business issues and strive to fully understand the details of its client’s business in order to set the restaurant on a successful path.

© 2024 SHERIN AND LODGEN LLP
For more information on Restaurant Leasing Issues, visit the NLR Real Estate section.

The Metaverse: A Legal Primer for the Hospitality Industry

The metaverse, regarded by many as the next frontier in digital commerce, does not, on its surface, appear to offer many benefits to an industry with a core mission of providing a physical space for guests to use and occupy. However, there are many opportunities that the metaverse may offer to owners, operators, licensors, managers, and other participants in the hospitality industry that should not be ignored.

What is the Metaverse?

The metaverse is a term used to describe a digital space that allows social interactions, frequently through use of a digital avatar by the user. Built largely using decentralized, blockchain technology instead of centralized servers, the metaverse consists of immersive, three-dimensional experiences, persistent and traceable digital assets, and a strong social component. The metaverse is still in its infancy, so many of the uses for the metaverse remain aspirational; however, metaverse platforms have already seen a great deal of activity and commerce. Meanwhile, technology companies are working to produce the next-generation consumer electronics that they hope will make the metaverse a more common location for commerce.

The Business Case for the Hospitality Industry

The hospitality industry may find the metaverse useful in enhancing marketing and guest experiences.

Immersive virtual tours of hotel properties and the surrounding area may allow potential customers to explore all aspects of the property and its surroundings before booking. Operators may also add additional booking options or promotions within the virtual tour to increase exposure to customers.

Creating hybrid, in-person and remote events, such as conferences, weddings, or other celebrations, is also possible through the metaverse. This would allow guests on-site to interact with those who are not physically present at the property for an integrated experience and possible additional revenue streams.

Significantly, numerous outlets have identified the metaverse as one of the top emerging trends in technology. As its popularity grows, the metaverse will become an important location for the hospitality industry to interact with and market to its customer base.

Legal Issues to Consider

  1. Select the right platform for you. There are multiple metaverse platforms, and they all have tradeoffs. Some, including Roblox and Fortnite, offer access to more consumers but generally give businesses less control over content within the programs. Others, such as Decentraland and the Sandbox, provide businesses with greater control but smaller audiences and higher barriers to entry. Each business should consider who its target audience is, what platform will be best to reach that audience, and its long term metaverse strategy before committing to a particular platform.
  2. Register your IP. Businesses should consider filing trademark applications covering core metaverse goods or services and securing any available blockchain domains, which can be used to facilitate metaverse payments and to direct users to blockchain content, such as websites and decentralized applications. Given the accelerating adoption of blockchain domains along with limited dispute resolution recourse available, we strongly encourage businesses to consider securing intellectual property rights now.
  3. Establish a dedicated legal entity. Businesses may want to consider setting up a new subsidiary or affiliate to hold digital assets, shield other parts of their business from metaverse-related liability, and isolate the potential tax consequences.
  4. Take custody of digital assets. Because of their digital character, digital assets such as cryptocurrency, which may be the primary method of payment in the metaverse, are uniquely vulnerable to loss and theft. Before acquiring cryptocurrency, businesses will need to set up a secure blockchain wallet and adopt appropriate access and security controls.
  5. Protect and enforce your IP. The decentralized nature of the metaverse poses a significant challenge to businesses and intellectual property owners. Avenues for enforcing intellectual property rights in the metaverse are constantly evolving and may require multiple tools to stop third-party infringements.
  6. Reserve metaverse rights. Each Business that licenses its IP, particularly those that do so on a geographic or territorial basis, should review existing license agreements to determine what rights, if any, its licensees have for metaverse-related uses. Moving forward, each brand owner is encouraged to expressly reserve rights for metaverse-related uses and exercise caution before authorizing any third party to deploy IP to the metaverse on a business’ behalf.
  7. Tax matters. Attention needs to be paid to how the tax law applies to metaverse transactions, despite the current tax law not fully addressing the metaverse. This is particularly the case for state and local sales and use, communications, and hotel taxes.

Ready to Enter?

As we move into the future, the metaverse appears poised to provide a tremendous opportunity for the hospitality industry to connect directly with consumers in an interactive way that was until recently considered science fiction. But like every new frontier, technological or otherwise, there are legal and regulatory hurdles to consider and overcome.

Article By Charles B. Ferguson, Jr. and Kimberly A. Wachen of ArentFox Schiff LLP

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

© 2022 ArentFox Schiff LLP

Is Next-Day Pay the Next Big Thing?

Among the hardest-to-find workers in America today are restaurant and retail workers. The current labor market is the tightest in 49 years, and for the past year, there have been roughly a million more open positions in the United States than people looking for work. The hospitality sector always has faced recruitment challenges, but the recently shrinking applicant pool has forced employers to look for creative ways to lure workers to jobs in the food service and retail industries.

“Expedited pay”—also known as “same day pay,” “next day pay,” or “daily pay”—provides employees with all or some portion of their wages without having to wait for the weekly or semi-monthly payroll cycle to conclude. While direct deposit, pay cards, and electronic fund transfers all have shortened the time that employees have to wait to access their funds, PayPal, Apple Pay, Venmo, and the like, in conjunction with Millennials’ and Generation Z’s expectation of seamless and immediate financial transactions, have upped the ante for immediate distribution of wages.

In an effort to address the challenges, several food-service groups are currently test marketing the next-day pay model. For example, Church’s Chicken and Bloomin’ Brands are offering forms of expedited pay in an effort to recruit and retain talent. The expedited process provides workers with almost immediate access to funds to bridge the gap between paydays for expenditures.

There are a variety of vendors and distribution methods for employers to consider. For example, Instant Financial provides immediate access to pay after a worker finishes his or her shift. PayActiv and FlexWage are app platforms through which employers may offer customized pay options to their employees.

Some vendors charge employers for their services while others deduct fees from employees’ pay. These fees vary, and employers will want to understand what they are being charged before either contracting with an app provider or making an app available through a payroll processing service. Similarly, employers may want to ensure that employees understand these fees as well. Additionally, employers may want to review state and local laws regarding whether passing along such fees to employees passes legal muster.

In determining whether to implement expedited pay, employers can ensure that all federal, state, and local minimum wage, overtime, and payday requirements will be met when deciding on a vendor or app for their workforce. Employers may also want to analyze the effectiveness of these expedited pay methods in assisting in recruitment efforts, employee engagement, and reducing turnover.

 

© 2019, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.
For more in employment news please see the National Law Review Labor & Employment page.

Don’t Gamble with the GDPR

The European Union’s (EU) General Data Protection Regulation (GDPR) goes into effect on May 25, and so do the significant fines against businesses that are not in compliance. Failure to comply carries penalties of up to 4 percent of global annual revenue per violation or $20 million Euros – whichever is highest.

This regulatory rollout is notable for U.S.-based hospitality businesses because the GDPR is not just limited to the EU. Rather, the GDPR applies to any organization, no matter where it has operations, if it offers goods or services to, or monitors the behavior of, EU individuals. It also applies to organizations that process or hold the personal data of EU individuals regardless of the company’s location. In other words, if a hotel markets its goods or services to EU individuals, beyond merely having a website, the GDPR applies.

The personal data at issue includes an individual’s name, address, date of birth, identification number, billing information, and any information that can be used alone or with other data to identify a person.

The risks are particularly high for the U.S. hospitality industry, including casino-resorts, because their businesses trigger GDPR-compliance obligations on numerous fronts. Hotels collect personal data from their guests to reserve rooms, coordinate event tickets, and offer loyalty/reward programs and other targeted incentives. Hotels with onsite casinos also collect and use financial information to set up gaming accounts, to track player win/loss activity, and to comply with federal anti-money laundering “know your customer” regulations.

Privacy Law Lags in the U.S.

Before getting into the details of GDPR, it is important to understand that the concept of privacy in the United States is vastly different from the concept of privacy in the rest of the world. For example, while the United States does not even have a federal law standardizing data breach notification across the country, the EU has had a significant privacy directive, the Data Protection Directive, since 1995. The GDPR is replacing the Directive in an attempt to standardize and improve data protection across the EU member states.

Where’s the Data?

Probably the most difficult part of the GDPR is understanding what data a company has, where it got it, how it is getting it, where it is stored, and with whom it is sharing that data. Depending on the size and geographical sprawl of the company, the data identification and audit process can be quite mind-boggling.

A proper data mapping process will take a micro-approach in determining what information the company has, where the information is located, who has access to the information, how the information is used, and how the information is transferred to any third parties. Once a company fully understands what information it has, why it has it, and what it is doing with it, it can start preparing for the GDPR.

What Does the Compliance Requirement Look Like in Application?

One of the key issues for GDPR-compliance is data subject consent. The concept is easy enough to understand: if a company takes a person’s personal information, it has to fully inform the individual why it is taking the information; what it may do with that information; and, unless a legitimate basis exists, obtain express consent from the individual to collect and use that information.

In terms of what a company has to do to get express consent under the GDPR, it means that a company will have to review and revise (and possibly implement) its internal policies, privacy notices, and vendor contracts to do the following:

  • Inform individuals what data you are collecting and why;

  • Inform individuals how you may use their data;

  • Inform individuals how you may share their data and, in turn, what the entities you shared the data with may do with it; and

  • Provide the individual a clear and concise mechanism to provide express consent for allowing the collection, each use, and transfer of information.

At a functional level, this process entails modifying some internal processes regarding data collection that will allow for express consent. In other words, rather than language such as, “by continuing to stay at this hotel, you consent to the terms of our Privacy Policy,” or “by continuing to use this website, you consent to the terms of our Privacy Policy,” individuals must be given an opportunity not to consent to the collection of their information, e.g., a click-box consent versus an automatically checked box.

The more difficult part regarding consent is that there is no grandfather clause for personal information collected pre-GDPR. This means that companies with personal data subject to the GDPR will no longer be allowed to have or use that information unless the personal information was obtained in line with the consent requirements of the GDPR or the company obtains proper consent for use of the data prior to the GDPR’s effective date of May 25, 2018.

What Are the Other “Lawful Basis” to Collect Data Other Than Consent?

Although consent will provide hotels the largest green light to collect, process, and use personal data, there are other lawful basis that may exist that will allow a hotel the right to collect data. This may include when it is necessary to perform a contract, to comply with legal obligations (such as AML compliance), or when necessary to serve the hotel’s legitimate interests without overriding the interests of the individual. This means that during the internal audit process of a hotel’s personal information collection methods (e.g., online forms, guest check-in forms, loyalty/rewards programs registration form, etc.), each guest question asked should be reviewed to ensure the information requested is either not personal information or that there is a lawful reason for asking for the information. For example, a guest’s arrival and departure date is relevant data for purposes of scheduling; however, a guest’s birthday, other than ensuring the person is of the legal age to consent, is more difficult to justify.

What Other Data Subject Rights Must Be Communicated?

Another significant requirement is the GDPR’s requirement that guests be informed of various other rights they have and how they can exercise them including:

  • The right of access to their personal information;

  • The right to rectify their personal information;

  • The right to erase their personal information (the right to be forgotten);

  • The right to restrict processing of their personal information;

  • The right to object;

  • The right of portability, i.e., to have their data transferred to another entity; and

  • The right not to be included in automated marketing initiatives or profiling.

Not only should these data subject rights be spelled out clearly in all guest-facing privacy notices and consent forms, but those notices/forms should include instructions and contact information informing the individuals how to exercise their rights.

What Is Required with Vendor Contracts?

Third parties are given access to certain data for various reasons, including to process credit card payments, implement loyalty/rewards programs, etc. For a hotel to allow a third party to access personal data, it must enter into a GDPR-compliance Data Processing Agreement (DPA) or revise an existing one so that it is GDPR compliant. This is because downstream processors of information protected by the GDPR must also comply with the GDPR. These processor requirements combined with the controller requirements, i.e., those of the hotel that control the data, require that a controller and processor entered into a written agreement that expressly provides:

  • The subject matter and duration of processing;

  • The nature and purpose of the processing;

  • The type of personal data and categories of data subject;

  • The obligations and rights of the controller;

  • The processor will only act on the written instructions of the controller;

  • The processor will ensure that people processing the data are subject to duty of confidence;

  • That the processor will take appropriate measures to ensure the security of processing;

  • The processor will only engage sub-processors with the prior consent of the controller under a written contract;

  • The processor will assist the controller in providing subject access and allowing data subjects to exercise their rights under the GDPR;

  • The processor will assist the controller in meetings its GDPR obligations in relation to the security of processing, the notification of personal data breaches, and data protection impact assessments;

  • The processor will delete or return all personal data to the controller as required at the end of the contract; and that

  • The processor will submit to audits and inspections to provide the controller with whatever information it needs to ensure that they are both meeting the Article 28 obligations and tell the controller immediately if it is asked to do something infringing the GDPR or other data protection law of the EU or a member state.

Other GDPR Concerns and Key Features

Consent and data portability are not the only thing that hotels and gambling companies need to think about once GDPR becomes a reality. They also need to think about the following issues:

  • Demonstrating compliance. All companies will need to be able to prove they are complying with the GDPR. This means keeping records of issue such as consent.

  • Data protection officer. Most companies that deal with large-scale data processing will need to appoint a data protection officer.

  • Breach reporting. Breaches of data must be reported to authorities within 72 hours and to affected individuals “without undue delay.” This means that hotels will need to have policies and procedures in place to comply with this requirement and, where applicable, ensure that any processors are contractually required to cooperate with the breach-notification process.

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

Hotels and Hospitality in Cuba: OFAC and Obama Paving the Way

cuba_800_11429With more flights, relaxing regulations, a historic presidential trip to Cuba, and news of hospitality services expanding into Cuba, the pathway into Cuba for hotels and hospitality companies seems smooth.  But businesses should look out for the potential hurdles and compliance risks.  Don’t fret – we can help you welcome your guests.

Reserve Your Room: Regulatory Background. Since President Obama announced the intent to improve our country’s relationship with Cuba and its people a year and a half ago, several revisions to the sanctions regime have focused on easing restrictions related to travel between the two nations.  In February 2016, Cuba and the United States agreed to reestablish commercial air travel between the two countries.  According to media reports, this agreement means the potential for 110 daily round-trip flights in and out of Cuba, including 20 daily flights to Havana.

Soon after the agreement was announced, major U.S. airlines submitted applications to fly commercial flights to Cuba.  Though tourist travel is still prohibited, twelve fairly broad categories of travel are authorized, including family visits, travel for government work, journalism, professional research, humanitarian work and educational activities, and “people-to-people” educational travel.

In mid-March of this year, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) again revised the Cuban Asset Control Regulations (CACR), permitting more travel-related transactions.  According to OFAC, the steps “expand opportunities for economic engagement between the Cuban people and the American business community.”  The agency announced the changes in preparation for President Obama’s historic trip to Cuba.

  • People-to-people educational travel. Previously, the general authorization for educational travel required that trips took place under the sponsorship of an organization and required that a representative from the organization accompany the travelers. The regulations no longer require booking through an authorized organization when going to Cuba under the people-to-people educational travel general license. This means that U.S. persons can freely travel to Cuba to engage in educational exchange activities that enhance contact with the Cuban people, support civil society in Cuba, or promote Cubans’ independence from their government, as long as they keep records of the travel transactions and full-time schedule of activities.

  • Financial Transactions. The regulations enable U.S. banks to process U.S. dollars and travelers’ checks from Cuban banks, to conduct U-turn transactions in which Cubans have an interest, and to allow Cuban nationals to open bank accounts to receive payments in the U.S.

  • Business Presence. In addition, the regulations allow certain carrier and travel services providers to maintain a business presence in Cuba under a general license.  This means that travel-service providers are authorized to establish and maintain subsidiaries, branches, offices, joint ventures, franchises, and other business relationships with any Cuban national, and enter into all necessary agreements or arrangements with such entity or individual.

These changes encourage much more travel between Cuba and the United States, ease restrictions that affect the ability to operate hotels and hospitality services in Cuba, and demonstrate a policy shift in favor of facilitating business, particularly in the travel sector, in Cuba.

Checking In: President Obama’s Historic Visit.  In late March 2016, President Obama visited Cuba as the first sitting U.S. president to visit Cuba since Calvin Coolidge visited in 1928.  Not only was President Obama’s visit a diplomatic feat as he quoted Cuban independence poet Jose Marti’s line: “Cultivo una rosa blanca” (“Cultivate a white rose”) in a live address on Cuban television, but it was also a marked invitation for more American business involvement in the island nation.  Notably, Marriott CEO Arne Sorenson accompanied President Obama on his visit.  According to media reports, Marriott is pursuing business opportunities to run or develop hotels on the island, and to provide training and opportunities for Cuban nationals to supply hotel needs.

Enjoy Your Stay: A Suite of Opportunities.  As a result of the steady changes in the travel regulations, many hotels and hospitality companies are eager to take advantage of the opportunities that await in Cuba.  Even before the most recent updates announced this year, Airbnb announced its presence in Cuba to provide bookings for U.S. travelers in the authorized travel categories.  More recently, the company announced it has received permission from OFAC to open its doors to non-U.S. travelers as well.  Starwood has reportedly signed three deals to open properties in Havana, apparently being the first hospitality company to obtain specific authorization from OFAC to operate hotels in Cuba.  We think this signals OFAC’s willingness to use its licensing authority favorably for hotel and hospitality companies looking to develop in Cuba.

Earlier this month, a trade fair in Havana hosted a hall full of companies in the construction industry eager to get in on the ground floor of real estate and hotel projects that seem to be on the horizon.  U.S. travel to Cuba reportedly increased between 77 percent in 2015, and this upward trend is expected to continue as a result of the recent regulatory changes.  As the travel restrictions ease, travel-related businesses may gain greater latitude to develop the infrastructure to support such travelers and provide economic benefits to the Cuban people.

Check All Your Belongings: Compliance Challenges to Consider

  • Working under General Licenses. Though there is a general license authorizing certain travel services, providing lodging services is still prohibited unless specifically licensed by OFAC. Tourist travel is still prohibited by statute. Businesses that wish to operate under the general licenses must put together procedures that comply with these restrictions.

  • Getting Authorization. In order to effectively negotiate and finalize agreements with Cuban counterparties for the provision of services outside the general licenses, U.S. companies must receive authorization from OFAC.  This makes doing business difficult because putting in the resources and time to apply and receive authorization may not make business sense unless companies have concrete opportunities.  OFAC is currently inundated with applications and Cuba questions.  Hotel and hospitality companies looking to expand in Cuba should plan as early as possible and be prepared for the license application process and approval to take several months.

  • Restrictions on Property and Development. The inability to own property outright under Cuban law is an obstacle for many hotel companies that seek to invest in facilities that will maintain and build their brands.  It is a challenge to find an existing property to develop or property on which to build. It can be an even greater challenge to import the materials needed to develop and maintain the property.  Even if a company acquires authorization to build and develop a hotel, there will be a plethora of suppliers who may also need to seek authorization.  S. businesses must plan accordingly when seeking authority to develop properties.

  • Dealing with the Cuban Government. S. businesses will have to learn quickly about negotiating with the Cuban government and getting government approvals because most potential counterparties are state-owned, and each step in the development process will likely include government involvement. This also raises corruption risks (Don’t forget the FCPA!) as companies wine and dine potential counterparties and work toward getting permits.

  • Employee Base. For foreign companies seeking to establish a brand in the market, restrictions on hiring may pose extreme challenges.  Employment in Cuba is not left to market dynamics. Hiring Cuban employees involves working with the Cuban government and hiring the personnel designated by the government.  Generally the employer is required to pay the Cuban government directly, and the government pays the employees.  Complying with such Cuban laws may fly directly in the face of a company’s business model and may compound the U.S. law compliance challenges.

  • Cuban Law. Having counsel who understand the Cuban legal landscape and regulatory challenges will be crucial for U.S. companies.  Structuring deals in Cuba that comply with Cuban law can be tricky.  The legal infrastructure in Cuba for foreign investment is not well developed, so U.S. companies will face a steep learning curve to successfully finalize and implement deals in Cuba.  Moreover, Cuban lawyers have very different ethical obligations than U.S. clients may be used to (including a virtual complete lack of attorney-client privilege).

Even with the host of challenges, exploring the Cuban market presents an intriguing opportunity for hotel and hospitality companies.  With the right compliance strategy and the right team, U.S. businesses could enjoy their stay in Cuba for years to come.

Article By Fatema K. Merchant & Lisa C. Mays of Sheppard, Mullin, Richter & Hampton LLP

© 2016, Sheppard Mullin Richter & Hampton LLP.

President Obama’s Announcement on U.S.-Cuban Relations Could Create Strategic Opportunities for American Companies

Neal Gerber

On December 17, 2014, the United States announced its intention to normalize diplomatic relations with Cuba. President Obama stated that, after nearly 54 years of economic and political isolation, his administration will be “taking steps to increase travel, commerce, and the flow of information to and from Cuba.”  He further remarked that “American businesses should not be put at a disadvantage….So we will facilitate authorized transactions between the United States and Cuba.”  This foreign policy directive could have significant effects on U.S. companies, particularly those in the hospitality and leisure sector, and their ability to conduct business with the Cuban government and Cuban nationals.

Before yesterday’s announcement, several laws and regulations have worked together to severely restrict commercial interaction between the United States and Cuba. In 1961, President Eisenhower severed diplomatic ties with Cuba under the Trading with the Enemy Act of 1917 (TWEA) and Congress passed the Foreign Assistance Act of 1961. Pursuant to the authority of these laws, President Kennedy issued a proclamation prohibiting all trade with Cuba on February 3, 1962. In 1992 and 1996, respectively, Congress passed two additional laws: the Cuban Democracy Act and Cuban Liberty and Democratic Solidarity (Libertad) Act. These laws contain additional restrictions on not only U.S. interactions with Cuba, butall nations’ contact with Cuba.

Today, the embargo is largely regulated by the Cuban Assets Control Regulations issued and enforced by the Treasury Department’s Office of Foreign Assets Control (OFAC). Under these rules, the circumstances in which a U.S. citizen or company may interact with Cuba or Cuban nationals are extremely limited. For example, the broad definitions of “interest,” “transfer,” and “transaction” under the Regulations prohibits a U.S. company from purchasing, or even conducting business with, any non-U.S. company that has, or has ever had, any commercial contact with a Cuban national. These restrictions have had a chilling effect on U.S. companies who wish to transact business with Canadian or Mexican companies who openly trade with Cuba despite the existence of U.S. laws that could result in sanctions for such activity. Further, many countries are unwilling to risk U.S. sanctions, leading to the embargo’s broad extraterritorial effects on both Cuba and these third-party nations.

Although it would take an act of Congress to completely overturn the embargo authorized by the Trading with the Enemy Act and subsequent legislation, President Obama’s recent remarks indicate that he intends to exercise executive authority to lessen the current impact of those laws by changes to existing regulations. Such changes could open the door for U.S. trade with both Cuban nationals and other non-U.S. companies with Cuban relationships.

This development has the potential to impact hospitality and leisure businesses, such as hotels, resorts and cruise lines, who may view this as an attractive opportunity to enter or re-enter a new market, given Cuba’s $64 billion economy. Neal Gerber Eisenberg’s newly launched Hospitality & Leisure group has worked with clients in the hospitality and leisure industry since the firm’s inception in 1986, including routinely advising clients on how to operate within the constraints of the current regulations.

Neal Gerber Eisenberg will continue to monitor these developments and update clients as to new laws and regulations that may impact commercial interaction with Cuba and Cuban nationals.

ARTICLE BY

Robert G. Gerber
Carrie E. Wilson
OF
Neal, Gerber & Eisenberg LLP