Tag: legal

Filing Requirements Under the Corporate Transparency Act: Stealth Beneficial Owners

The Corporate Transparency Act (“CTA”) requires most entities to file with the Financial Crimes Enforcement Network (“FinCEN,” a Bureau of the U.S. Department of the Treasury) Beneficial Ownership Information (“BOI”) about the individual persons who own and/or control the entities, unless an entity is exempt under the CTA from the filing requirement. There are civil and criminal penalties for failing to comply with this requirement.

A key issue: WHO are the Beneficial Owners?

FinCEN has issued a series of Frequently Asked Questions along with responses providing guidance on the issue of who the beneficial owners are.

Question A-1, issued on March 24, 2023, states that “[BOI] refers to identifying information about the individuals who directly or indirectly own or control a company.”

Question A-2, issued on Sept. 18, 2023: Why do companies have to report beneficial ownership information to the U.S Department of the Treasury? defines the CTA as “…part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

Question D-1, updated April 18, 2024: Who is a beneficial owner of a reporting company? states that “A beneficial owner is an individual who either directly or indirectly (i) exercises substantial control over a reporting company” and, in referring to Question D-2 (What is substantial control?), “owns or controls at least 25 percent of a reporting company’s ownership interests.”

Question D-1 goes on to note that beneficial owners must be individuals, i.e., natural persons. This guidance is extended by Question D-2 on Substantial Control, where control includes the power of an individual who is an “important decision-maker.” Question D-3 (What are important decisions?) identifies “important decisions” with a pictorial chart of subject matters that FinCEN considers important, such as the type of business, the design of necessary financings, and the structure of the entity. Question D-4 explores ownership interests (again with a pictorial) including equity interests, profit interests, convertible securities, options, or “any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.”

Who, in FinCEN’s view, has “substantial control”?

Question D-2 lists four categories of those who have substantial control:

  1. A senior officer, including both executive officers and anyone “who performs a similar function;”
  2. An individual with “authority to appoint or remove certain officers or directors;”
  3. An individual who is an important decision-maker; or
  4. An individual with “any other form of substantial control.”

“Silent partners” and/or other undisclosed principals, including some who may be using the reporting company for nefarious purposes, might be discussed here, but that is not the intended subject of this writing. Rather, this piece is intended to warn businesspersons and their advisers of potential “stealth beneficial owners” – those whose status as beneficial owners is not immediately obvious.

First, consider the typical limited liability company Operating Agreement for an LLC with enough members and distribution of ownership interests so that no member owns over 25% of the LLC’s equity. If the LLC is manager-managed, then the manager(s) is/are Beneficial Owners, but the other members are not. But what if the Operating Agreement requires a majority or super-majority vote to approve certain transactions? Assuming that those transactions are “important” (as discussed in Question D-3), then possessing a potential veto power makes EACH member a beneficial owner. Such contractual limitations on executive power necessarily raise the issue of “beneficial ownership” in corporations, in limited liability companies, and even in limited partnerships where the Limited Partners have power to constrain the general partner (who clearly is a beneficial owner).

Second, consider the very recent amendments to the Delaware General Corporation Law (“DGCL”) in response to the Delaware Chancery Court’s holding in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co (“Moelis”) Feb. 23, 2024. In Moelis, the CEO had a contract with the Company that materially limited the power of the Board of Directors to act in a significant number of matters. Vice Chancellor Travis Laster issued a 133-page opinion finding the agreement was invalid, as it violated the Delaware Law that placed management and governance responsibilities in the Board. Because such arrangements are frequently used in venture capital arrangements as part of raising capital for new enterprises, the Delaware Legislature and the State’s Governor enacted amendments to the DGCL that expressly authorize such contracts. In the Moelis situation itself, Ken Moelis was a major owner and CEO so he would have had to be disclosed as a Beneficial Owner if Moelis & Co. had not been exempt from the filing requirements of the CTA because it is a registered investment bank.

But what of a start-up venture entity where a wealthy venture investor owns a 10% interest in the entity, but has a stockholder agreement that gives him substantial governance rights including the ability to veto or even overrule board decisions? Is that venture investor not a “beneficial owner”? Somewhat even more Baroque, what about the private equity fund controlled by a dominant investor, say William Ackman or Nelson Peltz? If that fund invests in the same start-up entity and holds a 10% interest, but also has a stockholder agreement giving the fund substantial governance rights, isn’t the controlling owner of the fund a “beneficial owner” of the start-up?

Finally, consider financing with a “bankruptcy remote entity” where the Board of that entity includes a contingent director chosen by the finance source. The contingent director does not participate in any part of the governance of the entity unless the entity finds itself in financial distress. The organizational documents of the entity provide that at that point, the contingent director can veto any decision to file for bankruptcy protection. At that point, the contingent director apparently becomes a “beneficial owner” of the entity, with the CTA filing requirements applicable. A more interesting question is whether the contingency arrangement in the organizational documents makes the contingent director a “beneficial owner” from the inception of the financing. Further, with respect to bankruptcy, key questions remain unanswered, such as whether the trustee in a Chapter 7 bankruptcy proceeding or a liquidating trustee in a Chapter 11 bankruptcy proceeding has a reporting obligation under the CTA.

This piece is not intended to identify all the situations that may give rise to “Stealth Beneficial Owners.” Rather, its intent is to raise awareness of the complexities involved in answering the initial question – WHO is a “beneficial owner”?

©2024 Norris McLaughlin P.A., All Rights Reserved

FTC Announces Final Rule Imposing Civil Penalties for Fake Consumer Reviews and Testimonials

On August 14, 2024, the Federal Trade Commission announced a Final Rule combatting bogus consumer reviews and testimonials by prohibiting their sale or purchase. The Rule allows the FTC to strengthen enforcement, seek civil penalties against violators and deter AI-generated fake reviews.

“Fake reviews not only waste people’s time and money, but also pollute the marketplace and divert business away from honest competitors,” said FTC attorney Chair Lina M. Khan. “By strengthening the FTC’s toolkit to fight deceptive advertising, the final rule will protect Americans from getting cheated, put businesses that unlawfully game the system on notice, and promote markets that are fair, honest, and competitive.”

The Rule announced on August 14, 2024 follows an advance notice of proposed rulemaking and a notice of proposed rulemaking announced in November 2022 and June 2023, respectively. The FTC also held an informal hearing on the proposed rule in February 2024. In response to public comments, the Commission made numerous clarifications and adjustments to its previous proposal.

What Does the FTC Final on the Use of Consumer Reviews and Testimonials Prohibit?

The FTC Final Rule on the Use of Consumer Reviews and Testimonials prohibits:

Writing, selling, or buying fake or false consumer reviews. 

The Rule prohibits businesses from writing or selling consumer reviews that misrepresent they are by someone who does not exist or who did not have actual experience with the business or its products or services, or that misrepresent the reviewers’ experience. It also prohibits businesses from buying consumer reviews that they knew or should have known made such a misrepresentation. Businesses are also prohibited from procuring from certain company insiders such reviews about the business or its products or services for posting on third-party sites, when the businesses knew or should have known about the misrepresentation. The prohibitions on buying or procuring reviews do not cover generalized review solicitations to past customers or simply hosting reviews on the business’s website. Neither will a retailer or other entity be liable for sharing consumer reviews unless it would have been liable for displaying those same reviews on its own website.

Writing, selling, or disseminating fake or false testimonials. 

Businesses are similarly prohibited from writing or selling consumer or celebrity testimonials that make the same kinds of misrepresentations. The are also prohibited from disseminating or causing the dissemination of such testimonials when they knew or should have known about the misrepresentation. The prohibition on disseminating testimonials does not cover the type of generalized solicitations to past customers discussed above with respect to reviews.

Buying positive or negative reviews.

Businesses are prohibited from providing compensation or other incentives contingent on the writing of consumer reviews expressing a particular sentiment, either positive or negative. Violations here include situations in which such a contingency is express or implied. So, for example, while it prohibits offering $25 for a 5-star review, it also prohibits offering $25 for a review “telling everyone how much you love our product.”

Failing to make disclosures about insider reviews and testimonials.

The Rule prohibits a company’s officers and managers from writing reviews or testimonials about the business or its products or services without clearly disclosing their relationship. Businesses are also prohibited from disseminating testimonials by company insiders without clear disclosures, if the businesses knew or should have known of the relationship. A similar prohibition exists for officer or manager solicitations of reviews from their immediate relatives or from employees or agents of the business, and when officers or managers ask employees or agents to seek such reviews from relatives. For these various solicitations, the Rule is violated only if: (i) the officers or managers did not give instructions about making clear disclosures; (ii) the resulting reviews – either by the employees, agents, or the immediate relatives of the officers, managers, employees, or agents – appear without clear disclosures; and (iii) the officers or managers knew or should have known that such reviews appeared and failed to take steps to have those reviews either removed or amended to include clear disclosures. All of these prohibitions hinge on the undisclosed relationship being material to consumers. These disclosure provisions also clarify that they do not cover mere review hosting or generalized solicitations to past customers.

Deceptively claiming that company-controlled review websites are independent.

Businesses are prohibited from misrepresenting that websites or entities they control or operate are providing independent reviews or opinions, other than consumer reviews, about a category of businesses, products, or services that includes their own business, product, or service.

Illegally suppressing negative reviews.

The Rule prohibits using unfounded or groundless legal threats, physical threats, intimidation or public false accusations (when the accusation is made with knowledge that it is false or with reckless disregard as to its truth or falsity) to prevent the posting or cause the removal of all or part of a consumer review. Legal threats are “unfounded or groundless” if they are unwarranted by existing law or based on allegations that have no evidentiary support, according to the FTC. Also, if reviews on a marketer’s website have been suppressed based on their rating or negative sentiment, the Rule prohibits that business from misrepresenting that the reviews on a portion of its website dedicated to receiving and displaying such reviews represent most or all submitted reviews.

Selling and buying fake social media indicators.

The Rule prohibits the sale or distribution of fake indicators of social media influence, like fake followers or views. A “fake” indicator means one generated by a bot, a hijacked account, or that otherwise does not reflect a real individual’s or entity’s activities or opinions, according to the FTC. The Rule also bars anyone from buying or procuring such fake indicators. These prohibitions are limited to situations in which the violator knew or should have known that the indicators were fake and which involved misrepresentations of a person’s or company’s influence or importance for a commercial purpose.

The Rule does not specifically refer to AI. However, according to the FTC, these prohibitions cover situations when someone uses an AI tool to generate the deceptive content at issue.

According to the FTC, case-by-case enforcement without civil penalty authority might not be enough to deter clearly deceptive review and testimonial practices. The Supreme Court’s decision in AMG Capital Management LLC v. FTC has hindered the FTC’s ability to seek monetary relief for consumers under the FTC Act. The Rule is intended to enhance deterrence and strengthen FTC enforcement actions.

The Rule will become effective 60 days after the date it’s published in the Federal Register.

Takeaway: The FTC will aggressively enforce the new Rule. The agency has challenged illegal practices regarding bogus reviews and testimonials for quite some time. In addition to investigations and enforcement actions, the FTC has also issued guidance to help businesses to comply. According to the agency, online marketplaces and social media companies could and should do more when it comes to policing their platforms.

© 2024 Hinch Newman LLP
For more news on FTC’s Final Rule on Fake Reviews, visit the NLR Consumer Protection section.

AI Regulation Continues to Grow as Illinois Amends its Human Rights Act

Following laws enacted in jurisdictions such as Colorado, New York City, Tennessee, and the state’s own Artificial Intelligence Video Interview Act, on August 9, 2024, Illinois’ Governor signed House Bill (HB) 3773, also known as the “Limit Predictive Analytics Use” bill. The bill amends the Illinois Human Rights Act (Act) by adding certain uses of artificial intelligence (AI), including generative AI, to the long list of actions by covered employers that could constitute civil rights violations.

The amendments made by HB3773 take effect January 1, 2026, and add two new definitions to the law.

“Artificial intelligence” – which according to the amendments means:

a machine-based system that, for explicit or implicit objectives, infers, from the input it receives, how to generate outputs such as predictions, content, recommendations, or decisions that can influence physical or virtual environments.

The definition of AI includes “generative AI,” which has its own definition:

an automated computing system that, when prompted with human prompts, descriptions, or queries, can produce outputs that simulate human-produced content, including, but not limited to, the following: (1) textual outputs, such as short answers, essays, poetry, or longer compositions or answers; (2) image outputs, such as fine art, photographs, conceptual art, diagrams, and other images; (3) multimedia outputs, such as audio or video in the form of compositions, songs, or short-form or long-form audio or video; and (4) other content that would be otherwise produced by human means.

The plethora of AI tools available for use in the workplace continues unabated as HR professionals and managers vie to adopt effective and efficient solutions for finding the best candidates, assessing their performance, and otherwise improving decision making concerning human capital. In addition to understanding whether an organization is covered by a regulation of AI, such as HB3773, it also is important to determine whether the technology being deployed also falls within the law’s scope. Assuming the tool or application is not being developed inhouse, this analysis will require, among other things, working closely with the third-party vendor providing the tool or application to understand its capabilities and risks.

According to the amendments, covered employers can violate the Act in two ways. First, an employer that uses AI with respect to – recruitment, hiring, promotion, renewal of employment, selection for training or apprenticeship, discharge, discipline, tenure, or the terms, privileges, or conditions of employment – and which has the effect of subjecting employees to discrimination on the basis of protected classes under the Act may constitute a violation. The same may be true for employers that use zip codes as a proxy for protected classes under the Act.

Second, a covered employer that fails to provide notice to an employee that the employer is using AI for the purposes described above may be found to have violated the Act.

Unlike the Colorado or New York City laws, the amendments to the Act do not require a impact assessment or bias audit. They also do not provide any specifics concerning the notice requirement. However, the amendments require the Illinois Department of Human Rights (IDHR) to adopt regulations necessary for implementation and enforcement. These regulations will include rules concerning the notice, such as the time period and means for providing same.

We are sure to see more regulation in this space. While it is expected that some common threads will exist among the various rules and regulations concerning AI and generative AI, organizations leveraging these technologies will need to be aware of the differences and assess what additional compliance steps may be needed.

Jackson Lewis P.C. © 2024

It’s Official – BIPA’s “Per-Scan” Damages Are Out; Electronic Signatures Are In

If you heard a collective sigh of relief last week, it was probably businesses reacting as Illinois Governor Pritzker finally signed Senate Bill 2979, officially reforming BIPA for the first time since 2008. As a reminder, SB 2979 was passed back in May, but has been awaiting the Governor’s signature.

This development is significant for two reasons. First, the new law prohibits the recovery of “per-scan” damages. This means that if a business collects or discloses an individual’s biometric data without consent, then that business is only liable for one BIPA violation as to that individual. In 2023, the Illinois Supreme Court’s decision in Cothron v. White Castle Systems decided that violations were accrued on a “per-scan” basis, leading to an outpouring of claims. This law effectively overrules that decision. Second, the bill permits businesses to fulfill the “written release” requirement for consent via “electronic signature.” This will make it easier for businesses to collect – and individuals to provide – consent for the collection and retention of biometric information.

Putting it into Practice: These amendments became effective on August 2, 2024. Businesses that anticipated costly litigation from a “per-scan” BIPA demand may have cause for relief. However, the prohibition on “per-scan” damages may not apply retroactively to pending BIPA actions. Additionally, businesses can reconfigure their consent flows to enable electronic signatures.

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by: David M. Poell , Kathryn Smith of Sheppard, Mullin, Richter & Hampton LLP

For more news on the Illinois Biometric Information Privacy Act (BIPA), visit the NLR Consumer Protection section.

Hurricanes and Earthquakes and Wildfires, Oh My!—Key Disaster Preparedness Considerations for Employers

A rash of recent natural disasters, from hurricanes to earthquakes to wildfires, serves as a timely reminder to employers of the potential for natural disasters to disrupt their operations and cause imminent hazards in the workplace.

Quick Hits

  • Natural disasters may be unpredictable and devastating, but employers can take steps to mitigate the impact of natural disasters on their businesses and workforces.
  • Employers may want to brush off and review their disaster-response plans and consider other legal implications for responding to natural disasters.

Tropical Storm Debby has reportedly caused at least six deaths since making landfall in Florida as a Category 1 hurricane on August 5, 2024. The storm is now progressing up the East Coast, dropping heavy rains and spawning tornadoes.

Meanwhile, on August 6, a 5.2-magnitude earthquake struck Southern California, sparking fears of another devastating major earthquake. Both come as wildfires continue to ravage the Pacific Northwest and Canada, with experts warning of the risk of more in the coming weeks due to a combination of seasonal lightning and dry forests.

Mid-August to mid-October is typically peak hurricane season, but hurricanes, earthquakes, floods, and wildfires can occur at almost any time and with little warning. Such natural disasters cause physical damage, disrupt business operations, and affect employees’ well-being.

Given these risks, employers may need to take proactive steps to ensure the safety of their workforce and the continuity of their operations. Here are some considerations for employers that need to prepare for and manage the impacts of these natural disasters on their workplaces.

A Comprehensive Disaster Plan

Many employers have already crafted well-thought-out emergency or disaster-response plans tailored to their organizations and workplaces. Employers may want to review and regularly update these plans, which may include:

  • Emergency Communication: A plan may establish and outline clear communication channels, ideally through multiple avenues, with employees before, during, and after an event. To be effective, an emergency communication plan relies on a current and complete roster of employees, including home addresses, cell phone numbers, and personal email addresses. Now might be a good time for employers to ensure that rosters include all personnel added since the list was created and that they account for all changes in employee data.
  • Evacuation Procedures: A plan may set safe evacuation routes and meeting points. The plan might also include a designated date to reenact these procedures on a recurring basis.
  • Employee Support: A plan may establish a check-in system to account for the status and whereabouts of all employees during and after a disaster.
  • Data Protection: Employers may want to ensure that important company information and data are protected, backed up, and accessible from remote locations. This aspect of the plan will likely require collaboration with a company’s IT group and may involve purchasing additional equipment or software.

Flexibility in Work Arrangements

Natural disasters may cause physical damage to workplaces, create hazards for travel or commutes, and cause other disruptions that make it difficult for some employees to be physically present in the workplace or to work their regular hours. Given these challenges, employers may want to consider implementing:

  • flexible work arrangements, including temporary remote work policies;
  • adjustments to work schedules to accommodate transportation or safety issues;
  • leave availability for certain employees who may be forced to deal with family or medical issues caused by a natural disaster; or
  • a temporary suspension of operations if possible and if safety cannot be guaranteed.

Legal and Insurance Considerations

Understanding the legal and financial aspects of managing natural disasters is critical for any employer in a disaster scenario. Employers may want to review insurance policies to understand disaster coverage and be prepared to promptly report damage from a natural disaster. Further, employers in certain regulated industries may need to contact regulatory agencies regarding the status of their operations.

Applicable Federal Laws and Regulations

Natural disasters and disruptions to employee schedules may implicate a host of federal laws and regulations, including the Worker Adjustment and Retraining Notification (WARN) Act, the Fair Labor Standards Act (FLSA), the Occupational Safety and Health (OSH) Act, and the National Labor Relations Act (NLRA).

  • WARN Act: Typically, the law requires employers with fifty or more employees to provide advanced notice of plant closings or mass layoffs, but the law has an exception for plant closings or natural disasters that are the direct result of natural disasters. Natural disasters are defined in the WARN Act regulations as “[f]loods, earthquakes, droughts, storms, tidal waves or tsunamis and similar effects of nature are natural disasters.” Employers are still required to provide “as much notice as is practicable, and at that time shall give a brief statement of the basis for reducing the notification period.”
  • FLSA: Employers are required to pay employees for all hours worked, and if time records are lost as a result of the disaster, then they must pay employees based on their regular hours or have employees self-report hours worked. The FLSA does not require employers to continue to pay nonexempt workers if they are not required to work, or are unable to work, following a disaster, but the law does require that exempt, salaried workers be paid for any workweek in which some work has been performed.
  • OSH Act: The law, enforced by the Occupational Safety and Health Administration (OSHA), requires employers to protect employees against “recognized hazards,” including those caused by natural disasters. Notably, employees have a right to refuse to work if they have a good-faith belief that they might be exposed to imminent danger.
  • NLRA: Labor protections for workers who engage in “concerted protected activity” apply to issues over working conditions impacted by natural disasters. Employers may have further obligations in cases of natural disasters under their collective bargaining agreements.
  • State Law: Some states, like Texas and California, prohibit employers from discharging or taking other adverse action against employees who leave work, or fail to report to work, due to their participation in an emergency evacuation order issued for the public. Specifically, the California law took effect on January 1, 2023, and prohibits employers from taking adverse action against employees  “for refusing to report to, or leaving, a workplace or worksite within the affected area because the employee has a reasonable belief that the workplace or worksite is unsafe” in the event of an emergency condition.

Next Steps

Natural disasters may be unpredictable and devastating, but employers can mitigate the impact on their businesses and workforces through proper planning. As such, employers may want to consider reviewing or developing disaster preparedness plans and policies to ensure they are ready to handle complications caused by any natural disaster.

© 2024, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.
For more news on Disaster Preparedness in the Workplace, visit the NLR Labor Employment section.

Top Questions Health Care Providers Should Consider in a Post-Chevron World – A Polsinelli Round Table Discussion

Health Care is one of the most regulated industries in the country, and for many years, one of the key administrative agencies overseeing health care in the United States, the Department of Health and Human Services’ (“HHS”) Centers for Medicare & Medicaid Services (“CMS”), has enjoyed broad authority to regulate health care under the “Chevron doctrine.” Under this doctrine, CMS and other federal agencies were granted broad discretion to interpret and implement the law, thus allowing them to drive how care is delivered and paid for in the United States. It was difficult for providers to successfully challenge agency rulemaking in federal court, even if they thought the agency’s interpretation of the law was incorrect. The Supreme Court’s dismantling of Chevron doctrine will have a significant impact on health care providers, which we may begin to see as we move into CMS’s annual rulemaking cycle.

The Supreme Court’s decision to overturn Chevron was expected, but it is still too soon to truly understand the full impact of the decisions on the health care industry. A round table of attorneys and policy advisors from Polsinelli’s Health Care, Public Policy and Government Investigations Department discussed the potential short and long-term implications of the decision and offer the following insights for health care providers across this ever-changing industry for navigating the web of statutes, rules and other sub-regulatory guidance post-Chevron.

1. What do the Loper/Relentless Decisions Change for Health Care Organizations in the Short-Term? Has CMS’s Authority to Regulate Health Care Gone Away or Been Substantially Limited?

“Likely, not. Many of the health care regulations are based on clear statutory language and will continue to give providers the rules for the road from a compliance standpoint. More controversial rules – like mental health parity, payment cuts, surprise billing, antidiscrimination, etc. – may be further delayed or even tabled for the short term while we learn more about how these challenges will be viewed by the courts. To the extent health care providers are struggling with a rulemaking negatively impacting them, it is worth beginning to evaluate whether challenging it may be warranted.” – Bragg Hemme

“CMS’s authority to regulate today is just like yesterday and probably tomorrow. Without a challenger to a rule, any rule continues unchanged – at least for the short-term. We have already seen; however, some regulated entities challenge a particular rule to a federal court and get some immediate regulatory relief. Members of Congress who want to see large scale changes to regulatory authority may well pursue identification of rules that were upheld in lower courts citing Chevron with an eye towards vitiating those rules with broad Congressional action. There are thousands of such cases and potentially impacted rules.” – Jennifer Evans

“Where the crux of Loper Bright unravels the courts’ existing practice of deferring to regulators’ interpretation of a statute that is unclear or ambiguous, we can expect to see increased litigation that challenges agency action arguing that the foundational law for such action was ambiguous and the agency has exceeded its statutory authority. It is unlikely we will see any change in regulator action or regulatory enforcement unless and until courts begin to overturn agency action on the basis that a statute is ambiguous and the agency that interpretated the statute was incorrect. We can also expect to see increased legislation explicitly delegating more authority to agencies.” – Meredith Duncan and Sara Avakian

2. What are Some Specific Areas of Health Care Regulation that may be Impacted?  

Health Care Fraud, Waste, and Abuse Laws

“The overruling of Chevron may have a significant effect on the application of the health care fraud and abuse laws, particularly the Physician Self-Referral Law (“Stark Law”) and Anti-Kickback Statute (“AKS”). Over the years, agencies including the HHS Office of Inspector General (“OIG”) and CMS have published hundreds of pages of rules, preamble language, and explanatory sub-regulatory guidance regarding the application of these laws. Some of these interpretations favor regulated entities, while others favor enforcers. To the extent Loper Bright represents a fundamental change in the role of agencies in clarifying or refining the scope and effect of statutory language, these implementing regulations and, thus, some longstanding health care industry practices could be impacted.” – Neal Shah

Reimbursement

“Coverage and payment rules from CMS (Medicare and Medicaid) and DHA (TriCare) may be ripe for attack. It will be interesting to see if the agencies are able or willing to engage in active negotiations to avoid or settle litigation that they did not face with Chevron deference.” – Jennifer Evans

“I anticipate that many of the routine Medicare reimbursement-related rulemakings (e.g., IPPS, OPPS, Physician Fee Schedule) will continue as they have in the past. Certain aspects of those rules or any controversial rulemakings may now be up for challenge. For instance, rules related to Disproportionate Share Hospitals have already been challenged since the Loper Bright decision. Any type of payment cut or agency effort to rein in health care costs, like Medicare drug pricing rules, surprise billing, mental health parity will also be closely scrutinized and likely challenged.” – Bragg Hemme

FDA

“Immediate impact is likely to be felt by the Lab Developed Test rule FDA is trying to finalize. Congress tried, but failed, to give the FDA statutory authority in this space via the VALID Act. The FDA went ahead and went through the rulemaking process in one year. This was lightspeed for the FDA. The rule was challenged prior to the reversal of Chevron. I expect to see the plaintiff amending their complaint now.”  – Michael Gaba

Surprise Billing

“I expect the Loper/Relentless decisions will impact the continued rollout of the regulations implementing the No Surprises Act. Since the law went into effect in 2022, regulations and guidance implementing the No Surprises Act have been vacated following challenges under the Administrative Procedures Act on four separate occasions – and that was under the prior Chevron standard, which of course was more deferential to agency decisions. But there are more rules that the Agencies are expected to issue – both as a result of the prior lawsuits and as part of their ongoing obligation to implement the law – that will have a significant impact on how the No Surprises Act functions in practice. These rules will also likely depend on the Departments’ interpretation of the No Surprises Act, and such interpretation will now not be afforded the deference that existed in the pre-Loper/Relentless landscape.” – Josh Arters

3. What Areas of Health Care Regulation are less Likely to be Impacted?

HIPAA

“From an HHS data privacy/security/breach perspective, the Jarkesy and Chevron decisions will arguably have very little impact unless parties are willing to challenge HHS HIPAA decisions in court. In other words, HHS OCR is proceeding as normal, and will continue to do so, particularly given that the HIPAA Rules were codified and specifically modified by Congress in the HITECH Act in 2009. However, to the extent a client would like to appeal a civil money penalty directly to a district court (Jarkesy) or attack a specific provision of sub regulatory guidance post-Chevron (Loper Bright), we could certainly attempt to do so.” – Iliana Peters

Long-Term Care

“Long term care providers are unlikely to see any immediate changes in regulation or enforcement. In most authorizing statutes, Congress delegated authority to CMS to develop and implement conditions of participation, and the guidance that has been provided interpreting those rules. It is unlikely the Loper Bright decision will cause CMS to change its survey process or the remedies imposed therefrom. However, any regulation or sub-regulatory guidance, such as the State Operations Manual, which is not expressly authorized by statute or otherwise interprets an ambiguous statute could be ripe for litigation to challenge CMS’ authority and/or CMS’ interpretation of the statute. To determine whether specific regulations and guidance is subject to challenge will require careful consideration of the Social Security Act and the deference, if any, afforded to CMS for rulemaking.” – Meredith Duncan and Sara Avakian

State Licensing & Practice Rules

“Many of the laws that impact health care providers, such as professional or facility licensing requirements and corporate practice of medicine prohibitions, are state laws that are unlikely to be immediately impacted by Loper Bright. However, Loper Bright may become a catalyst for new challenges to state-level administrative actions, which could create uncertainty related to state agency actions, such as Medical Board rules or guidance.”  – Kathleen Sutton

4. What Issues Should Health Care Organizations Anticipate in the Long-Term?

“It is unclear if there will be rule/no rule ‘chaos’ for health care organizations. When we think of all of the arrangements that default to ‘compliance with laws’ those provisions may lose meaning and effectiveness if the underlying legal rule-structure is threatened” – Jennifer Evans

“With the rise of litigation to combat potentially adverse rulemakings, we may see disagreement within the provider community to the extent some providers are ’winners’ and others are ‘losers.’ Further, we could see the same rulemaking get treated differently by courts depending on where the rules are being challenged. This will be very difficult to navigate for national providers. Hopefully, this ruling will cause regulatory agencies to take more shareholder feedback in their rulemaking. We will likely see more work needed at a Congressional level, however, if a statute is required for things that have historically been dealt with at a regulatory level, causing a slowdown.  This will be a challenge, particularly for innovative providers that are changing care models or adopting new technology, for instance. Health care rules often were behind the evolution of health care. Requiring Congressional action may present some opportunities but will not make things move faster.” – Bragg Hemme

“In the long-term, health care organizations should anticipate an increased opportunity to challenge unlawful regulations that run afoul of Congressional action. That is generally a good thing. But a negative consequence of the Loper Bright decisions is the likely impact on the agency rulemaking process, and the time it might take for agencies to issue regulations. Agencies are likely to move a bit slower when issuing new regulations in light of the dramatic change to how their rulemaking will be scrutinized by the courts going forward.” – Josh Arters

“It is likely that Congress will carefully craft new statutes and delegate more clear authority to the administrative agencies charged with enforcement. We also anticipate agencies taking more time to carefully craft their rules and guidance to mitigate the challenges that could arise based on these decisions. For providers, this will only further delay an already backlogged process.” – Meredith Duncan and Sara Avakian

“Loper Bright creates opportunities for health care organizations to challenge agency actions, but this opportunity comes at the expense of clarity and certainty that came from deference to agencies. The health care regulatory landscape is already complex and ever-changing, but the lack of uniformity that may result from different courts interpreting the same set of rules is going to create further complexity and confusion. The aftermath of Loper Bright may create a chilling effect for innovation or growth for health care businesses. Health care organizations will have to be strategic and stay up-to-date on the changing laws to maintain and grow their businesses while navigating this uncertainty.” – Kathleen Sutton

5. What can Health Care Organizations do if a CMS Rulemaking Has a Significant Impact on their Organization?

“If a rule isn’t working and there is a reasonable interpretation that the statue enabling the rule offers a better outcome, it may be time for health care organizations to start their engines and challenge rules that don’t match specific statutory requirements and fundamental principles. For example, think about adequate reimbursement and access to care. Does this reopen a provider’s ability to litigate payment rules that do not ensure access to care? Maybe.” – Jennifer Evans

“When faced with rulemaking that has a significant impact on operations, health care organizations might be presented with an opportunity to work with federal agencies to find a resolution without having to resort to litigation. Now that agencies understand that their rulemaking may be challenged under a less deferential standard, and, at least for now, most courts have held that a district court may vacate unlawful rules nationally, agencies might be more willing to find more creative and/or individualized solutions to the unique impact their rules might have on a particular health care organization.” – Josh Arters

6. Does this Decision Provide a Greater Ability for Health Care Providers to Advocate for Laws and Regulations to CMS and/or Congress?

“Providers have always had the opportunity to make a contribution in the public policy process; Loper means it is even more important. Engagement in the public policy process does not guarantee success, but lack of involvement almost certainly means a loss.  Both the legislature and agencies may be more open to negotiated laws and regulations. These processes will take longer, however.” – Julius Hobson

“Being part of the debate in the US Congress on health care legislation (and any legislation for that matter) is now more crucial than ever. Members of Congress will no longer be able to write laws that are ambiguous, which would give the agency of jurisdiction the authority to legislate through regulatory fiat. Congress now will be required to be more prescriptive in their laws, outlining specifically in statute the intent of the law. Congress currently relies on ‘report language’ that accompanies legislation, which expresses the legislative intent; however, the report language is not the black letter of the law and more often than not, the agency of jurisdiction ignores report language.  Finally, now that the Congress will need to be more prescriptive in its drafting of legislation Congress will be required be even more deliberative in crafting a bill. This will mean that laws will require more consensus to get the bills it works on approved.”  – Harry Sporidis

“In 2019, when the Supreme Court issued the Azar v. Allina Health Services decision, every component in CMS was tasked with reviewing, analyzing, and verifying that all the guidance materials had regulatory and/or statutory support. For a few years after the decision, CMS went through the rulemaking process for any guidance/policy that was not clearly articulated or supported by regulation. Now that the Supreme Court has overturned Chevron, CMS will likely conduct a similar exercise to determine all of the policy areas where the law is ambiguous, and the Agency has made the determination on how best to carry out the law. CMS will also likely consult with its legislative arm to work with Congress to clarify such laws. This undertaking will take CMS several years to complete. While CMS is engaged its review, there is an opportunity for health care organizations to engage with CMS to review policy position that result from an ambiguous statute and reconsider a more favorable interpretation on of the law.” – Ronke Fabayo

Sara Avakian, Iliana L. Peters, Kathleen Snow Sutton, Julius W. Hobson, Jr., Harry Sporidis, and Ronke Fabayo also contributed to this article.

© Polsinelli PC, Polsinelli LLP in California
by: Bragg E. Hemme, Jennifer L. Evans, Meredith A. Duncan, Neal D. Shah , Michael M. Gaba, and Joshua D. Arters of Polsinelli PC

For more news on the Health Care Industry Post-Chevron, visit the NLR Health Law & Managed Care section.

NJDEP Publishes New Climate Change Rule Proposal

Substantial changes to NJDEP’s use Coastal, Flood Hazard, Wetland and Stormwater regulatory programs are coming that will severely impact proposed and existing development. NJDEP published its Protecting Against Climate Threats (PACT) Resilient Environments and Landscapes (REAL) rule in the August 5, 2024 New Jersey Register and has up to a year to adopt the proposed amendments.

The proposal is extensive and will implement sweeping regulatory changes across various regulatory permitting programs, affecting new development and redevelopment, and substantial improvements to existing development. The proposal relies on several reports and studies commissioned or prepared by NJDEP, including the NJ Scientific Report on Climate Change (NJ Climate Science Report), the New Jersey Climate Change Alliance Science and Technical Advisory Panel (STAP) “Rising Seas and Changing Coastal Storms” report prepared by Rutgers University, and two rainfall studies in 2021, which predict a less than 17% chance that sea level rise (“SLR”) will exceed 5.1 feet by Year 2100, and that the State’s precipitation rates and intensity are expected to increase through the Year 2100. DEP is using this very conservative less than 17% chance as the basis for these proposed rules.

NJDEP will establish a regulatory Inundation Risk Zone (IRZ) largely in coastal areas along tidal waters that are predicted to be at risk of daily inundation or standing flood waters of up to 5.1 feet (by Year 2100). The extent of the IRZ is determined by adding 5 feet to the calculated mean higher high water (MHHW) line elevation. Projects in the IRZ involving new residential development, critical buildings and substantial improvements to existing structures will need to meet onerous enhanced risk assessment criteria including an alternatives analysis designed to avoid the risk (a/k/a discourage building). The rule will also establish a new Climate Adjusted Flood Elevation (CAFE) in tidal flood hazard areas, which represents a 5-foot addition to FEMA’s 100-year flood elevation based on NJDEP’s very conservative SLR predictions.

Numerous other proscriptive measures are proposed. Some of the more noteworthy provisions are listed below.

General 

  • New burdens will be imposed regarding pre-commencement work notices, including that such notices be made no more than 14 days in advance of the start of work in addition to reporting requirements for completion of work. In our experience, notices similar to these are simply filed and are merely a regulatory burden.

Coastal 

  • Non-mainland (barrier island) coastal centers will be extinguished and, in many cases, strict new impervious cover limitations (3%) and vegetative preserve/plantings requirements will become applicable. This makes development or redevelopment in most of the barrier islands improbable, if not impossible.
  • A 3% cover limit will be applicable even in designated centers for lands identified as a Coastal Environmentally Sensitive Area, even if these areas can be otherwise developed with permits from discrete programs such as wetlands or flood hazard areas.
  • Construction continuation rights beyond the permit expiration date in the CAFRA Individual Permit context will be curtailed based on new requirements to justify the continuation based on the reasonable financial investment of the permittee “in proportion to the project as a whole”.
  • The CAFRA infill exception for a single-family house or duplex in a coastal high hazard area and erosion hazard area will be removed for parcels in the IRZ.

Wetlands 

  • Limitations and mitigation requirements will be enhanced with respect to wetland buffers and permitting.
  • New conditions will be imposed for wetland general permits requiring stormwater compliance for projects that are a major development, in contrast to the current rules which only require stormwater compliance if the wetland and/or buffer impacts are considered major development thresholds.
  • The rules will require General Permit applicants to demonstrate “no other practicable configuration” that would avoid or reduce the impacts to wetlands, effectively holding General Permit applicants to standards similar to the alternatives analysis required for an Individual Permit, contrary to the purpose of the General Permit program as a streamlined approval process.
  • Wetland buffer averaging plan approvals will impose onerous conditions requiring placement of conservation restrictions on the entire wetland and buffer complex, whether or not a project has only limited impacts and additional future regulated activities would otherwise be allowed under NJDEP’s rules, but for the conservation restriction.

Flood Hazard 

  • Permittees will need to recertify that flood hazard areas remain unchanged if work is not commenced within 180 days after a permit is issued, and the work must involve elements of permanent construction of a habitable structure and not only site clearing/preparation, excavation, roadwork or construction of accessory structures (garages). If flood hazard conditions have changed, the project may need to be revised to address the changed conditions, and NJDEP approval obtained before the approved work may occur.
  •  A FEMA Letter of Map Revision approval will be required for certain projects involving minimal flood elevation increases before NJDEP will take action on the permit application. This will add a substantial period of time to the review since FEMA is not required to make a decision within a specified time period, unlike DEP which must adhere to the 90-day law time periods for decision making.
  •  Single-family home subdivisions with more than two units will be held to the same access road elevation requirements currently applicable only to muti-residential and critical buildings, and NJDEP is removing the minimal flexibility currently afforded to redevelopment projects that allows for access roads to be up to a foot below the applicable flood elevation where it is not feasible to elevate. This will make many developments and redevelopments infeasible. There is no clarity on the issue of how far dry access must extend for it to be approvable by DEP.
  • New criteria will be imposed for access roads including that they must accommodate two-way traffic of motor vehicles providing access to and from each building for the duration of the flood.
  • The current restriction on construction of a single-family home on a lot created after 2007 in a fluvial flood hazard area if there is already an existing habitable building or authorization for same from NJDEP will be extended to multi-residence buildings.
  • Critical and multi-residence buildings will be required to grade pedestrian areas outside of the building footprint to 1 foot above CAFE subject to certain non-feasibility conditions.
  • Limitations and mitigation requirements will be enhanced with respect to riparian buffers and permitting, including removal of the current exemptions for disturbance in truncated riparian zones and along manmade channels conveying stormwater.
  • The land area subject to 150-foot riparian zone buffers associated with threatened or endangered species habitat is being expanded. Activities within 25 of top of bank will be curtailed.
  • A permit will be required to conduct horizontal directional drilling below riparian zones (or wetlands), and enhanced permitting requirements will be imposed for solar panels in a flood hazard area.
  • A Verification will need to be obtained for projects impacting riparian zones.

Stormwater 

  • Stormwater requirements will be enhanced including new requirements on redevelopment of 80% TSS removal for stormwater runoff for new and redeveloped motor vehicle surface (increased from 50% for redeveloped impervious surfaces).

The proposed amendments do nothing meaningful to incentivize development opportunities in areas outside of the IRZ or CAFE. The FHA hardship provisions do not provide meaningful opportunities for relief, and in fact, the proposal imposes new conditions making it even less likely that hardship relief may be obtained.

Legacy (previously, grandfathering) provisions remain consistent with current NJDEP rules and depend largely on securing relevant approvals or the filing of a complete application before the rules become effective. Applications submitted before the effective date and declared technically complete will qualify for legacy status.

Three public hearing dates are scheduled (September 5, 12 and 19, 2024) and comments on the rule proposal must be submitted by November 3, 2024. If you have questions regarding qualification for legacy status or how the forthcoming rules may affect your project, please contact one of the attorneys in our Environmental Department. A courtesy copy of the draft proposal can be found  here.

© 2024 Giordano, Halleran & Ciesla, P.C. All Rights Reserved
For more news on State Climate Change Laws, visit the NLR Environmental & Energy Resources section.

United States | Registration Selection Complete for FY2025 H-1B Second Lottery

Today, USCIS announced it has reached a sufficient number of registrations for the second H-1B lottery for fiscal year 2025 and has notified all prospective H-1B petitioners with selected registrations that they are eligible to file.

Key Points:

  • Only petitioners with selected registrations may file H-1B cap-subject petitions for FY 2025, and only for the beneficiary named in the applicable selected registration notice.
  • A second selection for the master’s cap was not conducted because enough master’s cap registrations had already been selected and sufficient petitions were received.
  • Registration selection only pertains to eligibility to file an H-1B cap-subject petition. Petitioners filing H-1B cap-subject petitions must still establish eligibility for petition approval based on existing statutory and regulatory requirements.

Additional Information: An H-1B cap-subject petition must be properly filed at the correct filing location or online at my.uscis.gov and within the filing period indicated on the relevant selection notice. The period for filing the H-1B cap-subject petition will be at least 90 days. Petitioners must include a copy of the applicable selection notice with the FY 2025 H-1B cap-subject petition.

USCIS published a final rule that increased fees required for most immigration applications and petitions on Jan. 31, 2024. The new fees are effective as of April 1, 2024, and petitions with incorrect fees will be rejected. Also, as of April 1, 2024, only the new edition of Form I-129, Petition for a Nonimmigrant Worker, will be accepted.

The increased filing fee for Form I-907, Request for Premium Processing Service, is effective as of Feb. 26, 2024. I-907 forms postmarked on or after Feb. 26, 2024, with the incorrect fee will be rejected and fees returned.

©2024 Berry Appleman & Leiden. All Rights Reserved.
For more news on the second H-1B lottery for fiscal year 2025, visit the NLR Immigration section.

Michigan Employers Take Note: New Ruling Impacts Paid Leave and Minimum Wage

Today, July 31, 2024, the Michigan Supreme Court released a highly anticipated opinion in the case of Mothering Justice v. Nessel. This case assessed the constitutionality of the Michigan Legislature’s 2018 “adopt-and-amend” strategy under which the Legislature adopted, and then immediately changed, two ballot proposals that would otherwise have been included on the November 2018 ballot for decision by Michigan voters. The ballot proposals pertained to Michigan minimum wage and paid sick leave requirements, and were originally entitled the Earned Sick Time Act (ESTA) and Improved Workforce Opportunity and Wage Act (IWOWA). The Legislature’s “adopt-and-amend” action had narrowed the original ballot proposal language, and resulted instead in the enactment of the Michigan Paid Medical Leave Act (PMLA) and current minimum wage provisions in effect since early 2019.

After years of legal challenge, the Michigan Supreme Court reversed a 2023 decision of the Michigan Court of Appeals, and ruled that the “adopt-and-amend” approach utilized by the Michigan Legislature violated the Michigan Constitution. The Court determined both of the ballot initiatives as originally adopted by the Legislature should be reinstated in lieu of current, amended versions. In the interests of justice and equity, the Court ordered the reinstatement to occur, but only after a time period the same as that which employers would have been provided to prepare for the new laws absent their improper amendment.

Therefore, significant new legal requirements will become effective February 21, 2025. These include:

  1. The paid leave ballot proposal as initially adopted by the Legislature in 2018, in the form of the ESTA, is reinstated effective February 21, 2025, in place of the PMLA. All covered employers must amend existing paid leave policies or implement new leave policies as applicable that comply with the ESTA by February 21, 2025. Key elements of the ESTA include:
    • All Michigan employers, except for the U.S. government, are covered.
    • All employees of a covered employer, rather than only certain categories of employees as provided under the PMLA, are covered.
    • Covered employers must accrue sick time for covered employees, at a rate of at least one hour of earned sick time for every 30 hours worked.
    • Employers with 10 or more employees, as defined by the ESTA, must allow employees to use up to 72 hours of paid earned sick time per year.
    • Employers with fewer than 10 employees, as defined by the ESTA, must provide up to 40 hours of earned paid sick time, and are permitted to provide remaining earned sick leave up to the required 72 hours per year on an unpaid basis, rather than paid.
    • Employers may not prohibit the carryover or cap the accrual of unused earned sick time.
    • Employers may limit the use of earned sick time in any year to 72 hours.
  2. The minimum wage ballot proposal as originally adopted by the Legislature in 2018, in the form of the IWOWA, is also effective February 21, 2025, subject to a phase in of certain requirements that remains to be determined at this time. The IWOWA will replace the narrower amendments that previously were enacted and took effect in 2019. Key provisions effective February 21, 2025, include:
    • The state minimum wage rate will be $10.00 plus the state treasurer’s inflation adjustment, which has yet to be calculated and released.
    • Future increases will be calculated annually based on inflation as specified in the IWOWA.
    • The existing “tip credit” provisions employers of tipped employees currently utilize to calculate whether they have been paid minimum wage will be phased out over a period of years and eliminated entirely by February 21, 2029.
    • Employees will have expanded rights as to how they are compensated for overtime work, including “comp time” as an alternative to customary payment of overtime wages.

The above will be applicable absent further judicial, legislative, or voter-driven constitutional action that prescribes a different course. As to judicial action, opportunities for appeal or rehearing of a state Supreme Court decision are limited and discretionary. As to voter-driven constitutional action, such as a referendum, the timing of the Court’s decision may well not permit for such action to be included on the 2024 ballot, even if sufficient support for such action were shown.

In terms of any legislative action to amend, such action could only occur in a future legislative session, meaning January 2025 or later. As to the level of support required, because the ballot proposals were adopted by the Legislature rather than approved by a majority of Michigan voters in an election process, the normal requirements will apply. Had the ballot proposals been approved by a majority of Michigan voters in the election, a 75% supermajority of both houses of the Legislature would have been required for any amendment passage.

© 2024 Varnum LLP

by: Luis E. Avila, Maureen Rouse-Ayoub, Stephanie R. Setterington, Elizabeth Wells Skaggs, Hannah A. Cone, and Ashleigh E. Draft of Varnum LLP

For more news on Michigan Employment Laws, visit the NLR Labor & Employment law section.