Tag: Regulatory

2013 Family and Medical Leave Act (FMLA) Amendments: Have you Complied?

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In February 2013, the U.S. DOL published the Final Rule implementing statutory changes to the Family and Medical Leave Act of 1993 (FMLA).  The final rule expanded the military family leave provisions, among other changes.  The following chart was adapted from the DOL’s Wage and Hour Division website and shows a side-by-side comparison of the salient provisions of the current regulations:

Qualifying Exigency Leave (§ 825.126)
2008 Regulations 2013 Regulations
An eligible employee may take FMLA leave for qualifying exigencies arising out of the fact that the employee’s spouse, son, daughter or parent (the covered military member) is on active duty or has been notified of an impending call or order to   active duty in support of a contingency operation.

Eligible employees may take qualifying exigency leave for any of the
following reasons:

(1) short notice deployment; (2) military events and related activities; (3) childcare and school activities; (4) financial and legal arrangements; (5) counseling; (6) rest and recuperation; (7) post-deployment activities; and (8) additional activities.

Employees who request qualifying exigency leave to spend time with a military member on Rest and Recuperation leave may take up to five days of leave.

 “Covered military   member” is now “military member” and includes both members of the National Guard and Reserves and the Regular Armed Forces.

“Active duty” is now “covered active duty” and requires deployment to a foreign country.

A new qualifying exigency leave category for parental care leave is added.  Eligible employees may take leave to care for a military member’s parent who   is incapable of self-care when the care is necessitated by the member’s covered active duty. Such care may include arranging for alternative care, providing care on an immediate need basis, admitting or transferring the parent to a care facility, or attending meetings with staff at a care facility.

The amount of time an eligible employee may take for Rest and Recuperation qualifying exigency leave is expanded to a maximum of 15 calendar days.
 

Military Caregiver Leave (§ 825.127)
2008 Regulations 2013 Regulations
An eligible employee who is the spouse, son, daughter, parent, or next of kin of a covered servicemember (a current servicemember) of the Armed Forces, including National Guard and Reserve members, with a serious injury or illness incurred in the line of duty on active duty for which the servicemember is undergoing medical treatment, recuperation, or therapy, is otherwise in outpatient   status, or is otherwise on the temporary disability retired list, may take up to 26 work weeks of FMLA leave to care for the servicemember in a single 12-month period. The definition of covered servicemember is expanded to include covered veterans who are undergoing medical treatment, recuperation, or therapy for a serious injury or illness.

A covered veteran is an individual who was discharged or released under conditions other than dishonorable at any time during the five-year period prior to the first date the eligible employee takes FMLA leave to care for the covered veteran.

The period between enactment of the FY 2010 NDAA on October 28, 2009 and the effective date of the 2013 Final Rule is excluded in the determination of the five-year period for covered veteran status.
 

Serious Injury or Illness for a Current Servicemember (§ 825.127)
2008 Regulations 2013 Regulations
A serious injury or illness means an injury or illness incurred by a covered servicemember in the line of duty on active duty that may render the servicemember medically unfit to perform the duties of his or her office, grade, rank, or rating. The definition of a serious injury or illness for a current servicemember is expanded to included injuries or illnesses that existed before the beginning of the member’s active duty and were aggravated by service in the line of duty on active duty in the Armed Forces.
 

Serious Injury or Illness for a Covered Veteran (§ 825.127)
2008 Regulations 2013 Regulations
Not applicable. A serious injury or illness for a covered veteran means an injury or illness that was incurred or aggravated by the member in the line of duty on active duty in the Armed   Forces and manifested itself before or after the member became a veteran, and is:

(1) A continuation of a serious injury or illness that was incurred or aggravated when the covered veteran was a member of the Armed Forces and rendered the servicemember unable to perform the duties of the   servicemember’s office, grade, rank, or rating; OR

(2) A physical or mental condition for which the covered veteran has received a VA Service Related Disability Rating (VASRD) of 50 percent or greater and such VASRD rating is based, in whole or in part, on the condition precipitating the need for caregiver leave; OR

(3) A physical or mental condition that substantially impairs the veteran’s ability to secure or follow a substantially painful occupation by reason of a disability or disabilities related to military service or would do so absent treatment; OR

(4) An injury, including a psychological injury, on the basis of which the covered veteran has been enrolled in the Department of Veterans Affairs Program of Comprehensive Assistance for Family Caregivers.
 

Appendices
2008 Regulations 2013 Regulations
The FMLA optional-use forms and Notice to Employees of Rights Under the FMLA (poster) are provided in the appendices to the regulations. The FMLA optional-use forms and poster are removed from the regulations and no longer available in the appendices. They are now available on the Wage and Hour Division website, www.dol.gov/whd, as well as at local Wage and Hour district offices.

 

If you are a covered employer under FMLA, have you done the following?

Displayed the new DOL FMLA Notice Poster, electronically or in hard copy?

  • Updated your FMLA policy, which must be in your
    employee handbook or distributed to each employee?
  • Started using the new FMLA forms, such as the
    Notice of Eligibility, Designation Notice, and various Certification forms?
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Securities and Exchange Commission (SEC) Sanctions Revlon Financial Makeover; Tips for Setting a Strong Foundation for Going Private Transaction Success

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On June 13, 2013, the SEC entered into a cease and desist order and imposed an $850,000 civil money penalty against Revlon, Inc. (Revlon) in connection with a 2009 “going private” transaction (the Revlon SEC Order).  This article identifies some of the significant challenges in executing a going private transaction and highlights particular aspects of the Revlon deal that can serve as a teaching lesson for planning and minimizing potential risks and delays in future going private transactions.

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Background of Revlon Going Private Transaction.

The controlling stockholder of Revlon, MacAndrews & Forbes Holdings Inc. (M&F), made a proposal to the independent directors of Revlon in April of 2009 to acquire, by way of merger (the Merger Proposal), all of the Class A common stock not currently owned by M&F (the Revlon Minority Stockholders).  The Merger Proposal was submitted as a partial solution to address Revlon’s liquidity needs arising under an impending maturity of a $107 million senior subordinated term loan that was payable to M&F by a Revlon subsidiary.  A portion of this debt (equal to the liquidation value of the preferred stock issued in the Merger Proposal) would be contributed by M&F to Revlon, as part of the transaction.  This was submitted as an alternative in lieu of potentially cost-prohibitive and dilutive financing alternatives (or potentially unavailable financing alternatives) during the volatile credit market following the 2008 sub-prime mortgage crisis.

In response to the Merger Proposal, Revlon formed a special committee of the Board (the Special Committee) to evaluate the Merger Proposal.  The Special Committee retained a financial advisor and separate counsel to assist in its evaluation of the Merger Proposal.  Four lawsuits were filed in Delaware between April 24 and May 12 of 2009 challenging various aspects of the Merger Proposal.

On May 28, 2009, the Special Committee was informed by its financial advisor that it would be unable to render a fairness opinion on the Merger Proposal, and thereafter the Special Committee advised M&F that it could not recommend the Merger Proposal.  In early June of 2009, the Special Committee disbanded, but the independent directors subsequently were advised that M&F would make a voluntary exchange offer proposal to the full Revlon Board of Directors (the Exchange Offer). Revlon’s independent directors thereafter chose to continue to utilize counsel that served to advise the Special Committee, but they elected not to retain a financial advisor for assistance with the forthcoming M&F Exchange Offer proposal, because they were advised that the securities to be offered in the Exchange Offer would be substantially similar to those issuable through Merger Proposal.  As a result, they did not believe they could obtain a fairness opinion for the Exchange Offer consideration.  The Board of Directors of Revlon (without the interested directors participating in the vote) ultimately approved the Exchange Offer without receiving any fairness opinion with respect to the Exchange Offer.

On September 24, 2009, the final terms of the Exchange Offer were set and the offer was launched.  The Exchange Offer, having been extended several times, finally closed on October 8, 2009, with less than half of the shares tendered for exchange out of all Class A shares held by the Revlon Minority Stockholders.  On October 29, 2009, Revlon announced third quarter financial results that exceeded market expectations, but these results were allegedly consistent with the financial projections disclosed in the Exchange Offer.  Following these announced results, Revlon’s Class A stock price increased.  These developments led to the filing of additional litigation in Delaware Chancery Court.

The Revlon SEC Order and Associated Rule 13e-3 Considerations.

A subset of the Revlon Minority Stockholders consisted of participants in a Revlon 401(k) retirement plan, which was subject to obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and a trust agreement (the Trust Agreement) between Revlon and the Plan’s trustee (the Trustee).  Provisions of ERISA and the Trust Agreement prohibited a 401(k) Plan participant’s sale of common stock to Revlon for less than “adequate consideration.”

During July of 2009, Revlon became actively involved with the Trustee to control the flow of information concerning any adequate consideration determination, to prevent such information from flowing back to Revlon and to prevent such information from flowing to 401(k) participants (and ultimately Revlon Minority Stockholders); certain amendments to the Trust Agreement were requested by Revlon and agreed to by the Trustee to effect these purposes.  This also had the additional effect of preventing the independent directors of Revlon from being aware that an adequate consideration opinion would be rendered for the benefit of Revlon’s 401(k) Plan participants.

On September 28, 2009, the financial advisor to the 401(k) Plan rendered an adverse opinion that the Exchange Offer did not provide adequate consideration to 401(k) Plan participants.  As a result, the Trustee informed 401(k) Plan participants, as previously directed by Revlon, that the 401(k) Plan Trustee could not honor tender instructions because it would result in a “non-exempt prohibited transaction under ERISA.”  Revlon Minority Stockholders, including 401(k) Plan participants, were generally unaware that an unfavorable adequate consideration opinion had been delivered to the Trustee.

In the Revlon SEC Order, the SEC concluded that Revlon engaged in a series of materially misleading disclosures in violation of Rule 13e-3.  Despite disclosure in the Exchange Offer that the Revlon Board had approved the Exchange Offer and related transactions based upon the “totality of information presented to and considered by its members” and that such approval was the product of a “full, fair and complete” process, the SEC found that the process, in fact, was not full, fair and complete.  The SEC particularly found that the Board’s process “was compromised because Revlon concealed from both minority shareholders and from its independent board members that it had engaged in a course of conduct to ‘ring-fence’ the adequate consideration determination.”  The SEC further found that “Revlon’s ‘ring-fencing’ deprived the Board (and in turn Revlon Minority Stockholders) of the opportunity to receive revised, qualified or supplemental disclosures including any that might have informed them of the third party financial advisor’s determination that the transaction consideration to be received by the 401(k) members . . . was inadequate.”

Significance of the Revlon SEC Order.

The Revlon Order underscores the significance of transparency and fairness being extended to all unaffiliated stockholders in a Rule 13e-3 transaction, including the 401(k) Plan participants whose shares represented only 0.6 percent of the Revlon Minority Stockholder holdings.  Importantly, the SEC took exception to the fact that Revlon actively prevented the flow of information regarding fairness and found that the information should have been provided for the benefit of these participants, as well as all Revlon Minority Stockholders.  This result ensued despite the fact that Revlon’s Exchange Offer disclosures noted in detail the Special Committee’s inability to obtain a fairness opinion for the Merger Proposal and the substantially similar financial terms of the preferred stock offered in both the Merger Proposal and the Exchange Offer transactions.

Going Private Transactions are Subject to Heightened Review by the SEC and Involve Significant Risk, Including Personal Risk.

Going private transactions are vulnerable to multiple challenges, including state law fiduciary duty claims and wide ranging securities law claims, including claims for private damages as well as SEC civil money penalties.  In the Revlon transaction, the SEC Staff conducted a full review of the going private transaction filings.  Despite the significant substantive changes in disclosure brought about through the SEC comment process, the SEC subsequently pursued an enforcement action and prevailed against Revlon for civil money penalties.

Although the SEC sanction was limited in scope to Revlon, it is worth noting that the SEC required each of Revlon, M&F and M&F’s controlling stockholder, Ronald Perelman, to acknowledge (i) personal responsibility for the adequacy and accuracy of disclosure in each filing; (ii) that Staff comments do not foreclose the SEC from taking action including enforcement action with regard to the filing; and (iii) that each may not assert staff comments as a defense in any proceeding initiated by the SEC or any other person under securities laws.  Thus, in planning a going private transaction, an issuer and each affiliate engaged in the transaction (each, a Filing Person) must make these acknowledgements, which expose each Filing Person (including certain affiliates who may be natural persons) to potential damages and sanctions.

The SEC also requires Filing Persons to demonstrate in excruciating detail the basis for their beliefs regarding the fairness of the transaction.  These inquiries typically focus on the process followed in pursuing and negotiating the transaction, the procedural fairness associated with such process, and the substantive fairness of the overall transaction, including financial fairness.  As a result of this, each Filing Person (including certain natural persons) in a going private transaction should be prepared to diligently satisfy cumbersome process and fairness requirements as part of the pre-filing period deliberative process, and later stand behind extensive and detailed disclosures that demonstrate and articulate the basis of the procedural and substantive fairness of the transaction, including financial fairness.

Damages and Penalties in Going Private Transactions Can Be Significant.

It is worth noting that civil money penalties and settlements that have been announced to date by Revlon for its Exchange Offer going private transaction is approximately $30 million.  After factoring in professional fees, it would not be surprising that the total post-closing costs, penalties and settlements approach 50 percent of the implied total transaction value of all securities offered in the Exchange Offer transaction.  From this experience, it is obvious that costs, damages and penalties can be a significant component of overall transaction consideration, and these risks must be factored in as part of overall transaction planning at the outset.

Given the risks of post-transaction damages and costs, it is essential that future going private transactions be structured and executed by Filing Persons with the foregoing considerations in mind in order to advance a transaction with full transparency, a demonstrably fair procedural process and deal consideration that is substantively fair and demonstrably supportable as fair from a financial point-of-view.

New York State Court of Appeals Backs Starbucks Policy on Tip-Pooling

Sheppard Mullin 2012

Starbucks shift supervisors can legally participate in tip-sharing with other store employees, but the coffee chain’s assistant managers have enough managerial responsibility to disqualify them from sharing in customer tips, according to the New York State Court of Appeals.

Starbucks’ policy provides for weekly distribution of gratuities to the company’s two lower ranking categories of employees, baristas and shift supervisors, but not to its two higher ranking categories of employees, assistant managers and store managers. In addressing questions certified by the Second Circuit regarding the validity this policy, the Court of Appeals concluded that since shift supervisors, like baristas, directly serve patrons, they remain tip-pool eligible even if their role also involves some supervisory responsibility. But assistant managers, because they are granted “meaningful authority” over subordinates, are not eligible to participate in the tip pool.

The decision provides guidance to the Second Circuit as it hears appeals of two suits, Barenboim et al. v. Starbucks Corporation, No. 10–4912–cv, and Winans et al. v. Starbucks Corporation, No. 11–3199–cv, each brought by a different putative class of Starbucks workers. The plaintiffs in Barenboimare Starbucks baristas who argue that only baristas, and not shift supervisors, are entitled to participate in tip-sharing. The Winans plaintiffs are assistant managers who claim that they should be allowed a share of the tips. In both cases, the Southern District of New York awarded summary judgment to Starbucks, and the plaintiffs appealed. The Second Circuit certified questions to the New York Court of Appeals regarding the interpretation of New York Labor Law §196-d, which governs tip-pooling.

Shift Supervisors Are Not Company “Agents”

New York Labor Law §196-d prohibits an “employer or his agent or an officer or agent of any corporation, or any other person” from accepting or retaining any part of the gratuities received by an employee. It also states, “Nothing in this subdivision shall be construed as affecting the… sharing of tips by a waiter with a busboy or similar employee.”

According to the plaintiff baristas in Barenboim, Starbucks’ policy of including shift supervisors in the stores’ tip pools violates §196-d because the shift supervisors are company “agents” and therefore not permitted to “demand or accept, directly or indirectly, any part of the gratuities, received by an employee.” Starbucks argues that shift supervisors are sufficiently analogous to waiters, busboys and similar employees, and should therefore be permitted to share in the gratuities pursuant to §196-d.

The Court of Appeals, in deciding that shift supervisors are entitled to share in the tip pool, deferred to the New York State Department of Labor’s (“DOL”) long-standing view that “employees who regularly provide direct service to patrons remain tip-pool eligible even if they exercise a limited degree of supervisory responsibility.” The Court compared the shift supervisors to restaurant captains who have some authority over wait staff, but are nonetheless eligible to participate in tip pools pursuant to the DOL’s Hospitality Industry Wage Order and DOL guidelines dating back to 1972.

“Meaningful Authority” Standard

In Winans, the Starbucks assistant store managers argue that they should be deemed similar to waiters and busboys under §196-d (and therefore eligible for tip-sharing) because they do not have full or final authority to terminate subordinates. The Court of Appeals disagreed: “[W]e believe that there comes a point at which the degree of managerial responsibility becomes so substantial that the individual can no longer fairly be characterized as an employee similar to general wait staff within the meaning of Labor Law §196-d.” That line is drawn, according to the decision, at “meaningful or significant authority or control over subordinates.”

Examples of meaningful authority, according to the decision, are the ability to discipline subordinates, the authority to hire and terminate employees, and input into the creation of employee work schedules. Contrary to the plaintiffs’ claim, authority to hire and fire is not the exclusive test for determining whether an employee is similar to wait staff for the purposes of §196-d.

Tip-Sharing Required?

In addition to the question of which employees are eligible for tip-sharing, the Second Circuit asked the Court of Appeals to consider whether an employer may deny tip pool distributions to an employee who is eligible to split tips under §196-d. The Court held that §196-d excludes certain employees from tip pools, but does not require employers to include all employees who are not legally barred from participating.

Conclusion

The Court of Appeals decision provides specific guidance to the Second Circuit Court of Appeals in connection with the two Starbucks cases pending on appeal, but it also provides helpful clarity to any employers with tip-sharing policies. In particular, the decision confirms that employees who regularly provide direct service to patrons may still participate in tip-sharing, but are not required to do so, even if they exercise a limited degree of supervisory responsibility. On the other hand, employees with meaningful authority over subordinates are not eligible to participate in tip-sharing. Employers should carefully review their tip-sharing policies in light of this guidance from the Court of Appeals.

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Department of State Releases August 2013 Visa Bulletin

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EB-2 category for individuals chargeable to India advances by more than three years.

The U.S. Department of State (DOS) has released its August 2013 Visa Bulletin. The Visa Bulletin sets out per country priority date cutoffs that regulate the flow of adjustment of status (AOS) and consular immigrant visa applications. Foreign nationals may file applications to adjust their status to that of permanent resident or to obtain approval of an immigrant visa at a U.S. embassy or consulate abroad, provided that their priority dates are prior to the respective cutoff dates specified by the DOS.

What Does the August 2013 Visa Bulletin Say?

The cutoff date in the EB-2 category for individuals chargeable to India has advanced by three years and four months in an effort to fully utilize the numbers available under the annual limit. It is expected that such movement will generate a significant amount of demand from individuals chargeable to India during the coming months.

EB-1: All EB-1 categories remain current.

EB-2: A cutoff date of January 1, 2008 is now in effect for individuals in the EB-2 category from India, reflecting forward movement of three years and four months. A cutoff date of August 8, 2008 remains in effect from the July Visa Bulletin for individuals in the EB-2 category from China. The cutoff date remains current for individuals in the EB-2 category from all other countries.

EB-3: There is continued backlog in the EB-3 category for all countries, with minor forward movement for EB-3 individuals from the Philippines and no forward movement for EB-3 individuals from the rest of the world.

The relevant priority date cutoffs for foreign nationals in the EB-3 category are as follows:

China: January 1, 2009 (no forward movement)
India: January 22, 2003 (no forward movement)
Mexico: January 1, 2009 (no forward movement)
Philippines: October 22, 2006 (forward movement of 21 days)
Rest of the World: January 1, 2009 (no forward movement)

Developments Affecting the EB-2 Employment-Based Category

Mexico, the Philippines, and the Rest of the World

In November 2012, the EB-2 category for individuals chargeable to all countries other than China and India became current. This meant that EB-2 individuals chargeable to countries other than China and India could file AOS applications or have applications approved on or afterNovember 1, 2012. The August Visa Bulletin indicates that the EB-2 category will continue to remain current for these individuals through August 2013.

China

As with the July Visa Bulletin, the August Visa Bulletin indicates a cutoff date of August 8, 2008 for EB-2 individuals chargeable to China. This means that EB-2 individuals chargeable to China with a priority date prior to August 8, 2008 may continue to file AOS applications or have applications approved through August 2013.

India

From October 2012 through the present, the cutoff date for EB-2 individuals chargeable to India has been September 1, 2004. The August Visa Bulletin indicates forward movement of this cutoff date by more than three years to January 1, 2008. This means that EB-2 individuals chargeable to India with a priority date prior to January 1, 2008 may file AOS applications or have applications approved in August 2013. The August Visa Bulletin indicates that this cutoff date has been advanced in an effort to fully utilize the numbers available under the EB-2 annual limit. It is expected that such movement will generate a significant amount of demand from individuals chargeable to India during the coming months.

This significant advancement in the cutoff date for EB-2 individuals chargeable to India will quite possibly be followed by significant retrogression in the new fiscal year. Consequently, AOS applications filed in September 2013 may be received and receipted by U.S. Citizenship and Immigration Services; however, adjudication could be delayed. Applications for interim benefits, including employment authorization and advance parole, should be adjudicated in a timely manner notwithstanding any possible retrogression of cutoff dates.

Developments Affecting the EB-3 Employment-Based Category

In May, June, and July, the cutoff dates for EB-3 individuals chargeable to most countries advanced significantly in an attempt to generate demand and fully utilize the annual numerical limits for the category. The August Visa Bulletin indicates no additional forward movement in this category, with the exception of the Philippines, which advanced by 21 days.

China

The July Visa Bulletin indicated a cutoff date of January 1, 2009 for EB-3 individuals chargeable to China. The August Visa Bulletin indicates no movement of this cutoff date. This means that EB-3 individuals chargeable to China with a priority date prior to January 1, 2009 may file AOS applications or have applications approved through August 2013.

India

Additionally, the July Visa Bulletin indicated a cutoff date of January 22, 2003 for EB-3 individuals chargeable to India. The August Visa Bulletin indicates no movement of this cutoff date. This means that EB-3 individuals chargeable to India with a priority date prior to January 22, 2003 may file AOS applications or have applications approved through August 2013.

Rest of the World

The July Visa Bulletin indicated a cutoff date of January 1, 2009 for EB-3 individuals chargeable to the Rest of the World. The August Visa Bulletin indicates no movement of this cutoff date. This means that individuals chargeable to all countries other than China, India, Mexico, and the Philippines with a priority date prior to January 1, 2009 may file AOS applications or have applications approved through August 2013.

How This Affects You

Priority date cutoffs are assessed on a monthly basis by the DOS, based on anticipated demand. Cutoff dates can move forward or backward or remain static. Employers and employees should take the immigrant visa backlogs into account in their long-term planning and take measures to mitigate their effects. To see the August 2013 Visa Bulletin in its entirety, please visit the DOS website here.

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On Heels of European Raids, Energy Companies Face U.S. Class Actions

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White Oaks Fund LP, an Illinois private placement fund, filed a class action suit last week against BP PLC, Royal Dutch Shell PLC and Statoil ASA in the Southern District of New York.  White Oaks Fund v. BP PLC, et al., case number 1:13-cv-04553.  The complaint alleges that the energy companies colluded to distort the price of crude oil by supplying false pricing information to Platts, a publisher of benchmark prices in the energy industry, in violation of the Sherman and Commodity Exchange Acts.  Plaintiffs claim that defendant companies are sophisticated market participants who knew that the incorrect information they provided to Platts would impact crude oil futures and derivative contracts prices traded in the U.S.

This action follows at least six civil litigations that have been filed against BP, Shell and Statoil after the European Commission (EC) and Norwegian Competition Authority raided the companies in May.  The London offices of Platts were also searched.  After the surprise raids, the EC has stated that it is investigating concerns that the companies conspired to manipulate benchmark rates for various oil and biofuel products and that the companies excluded other energy firms from the benchmarking process as part of the scheme.  In addition, at least one U.S. Senator has requested that the U.S. Department of Justice look into whether any of the alleged illegal behavior occurred in the U.S.

The private actions filed against these energy companies in the U.S. on the heels of an investigation by the European Commission are not uncommon.  Any company that transacts business in the U.S. and undergoes a raid or investigation by a foreign competition authority should prepare to face these civil litigations and defend itself against similar allegations.

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Michigan Supreme Court Won’t Give Advisory Opinion on Right-to-Work

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Saying simply that “we are not persuaded that granting the request would be an appropriate exercise of the court’s discretion,” the Michigan Supreme Court on Friday denied Gov. Rick Snyder’s request that the high court render an advisory opinion about the constitutionality of Michigan’s new right-to-work law.

Relying upon the provision in the state’s constitution’s that allows the governor to request the “opinion of the supreme court on important questions of law upon solemn occasions as to the constitutionality of legislation after it has been enacted into law but before its effective date,” the Governor had asked the Court for a ruling largely because the state’s public workers’ collective agreements are set to expire at the end of 2013. In a brief filed in support of the request for an advisory opinion, Michigan Solicitor General John Bursch said that an advisory opinion would prevent an “impasse at the negotiating table.”

Notwithstanding the Court’s decision, six lawsuits continue challenging the Act. Two of them are brought by unions or labor coalitions. Michigan State AFL-CIO v. Callaghan has been brought in federal court and challenges the constitutionality of the Act as to private sector workers. UAW v. Green, currently pending in the Michigan Court of Appeals, challenges the constitutionality as it applies to public sector workers. Here’s a helpful link to a chart describing the pending litigation.

SG Bursch also said in his filing with the Supreme Court that barring Supreme Court action, the state would consider filing a motion seeking an expedited ruling in the Green case.

The Detroit Free Press coverage on the court’s decision can be found here.

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Impact of Trademark Trial and Appeal Board (TTAB) Rulings in Court Decisions

Katten Muchin

The US Patent and Trademark Office’s Trademark Trial and Appeal Board (TTAB) provides, among other things, a forum for trademark owners to oppose the issuance of a certificate of registration for a mark filed by a third party which it believes is confusingly similar to its registered mark. Although the TTAB can issue a decision as to whether two marks are confusingly similar such that one of them should not be entitled to registration, the issue of whether one mark infringes another is beyond the scope of a TTAB proceeding and is instead left to the courts.

Therefore, when a trade mark owner is formulating its enforcement strategy, a common question that arises is whether a TTAB decision holding that two marks are confusingly similar would be dispositive when the same two marks are the subject of a trademark infringement claim before the courts. This issue was recently addressed by the Eighth Circuit in the case of B&B Hardware, Inc v Hargis Industries, Inc and the conclusion reached in this case can be helpful to brand owners contemplating their approach to brand enforcement.

B&B Hardware, the owner of a trade mark registration for the mark Sealtight covering a fastener product that is used predominantly in the aerospace industry, had successfully opposed a trade mark application filed by Hargis for the mark Sealtite covering a line of self-drilling and self-taping screws that are commonly used in the construction of metal buildings. Subsequently, B&B Hardware sued Hargis, making claims of trade mark infringement and unfair competition. The District Court rejected B&B Hardware’s claims and in doing so decided not give preclusive effect to the TTAB decision (that is, the Court did not allow the decision to preclude the issue from being re-litigated) which held that there was a likelihood of confusion between the two marks.

B&B Hardware appealed the decision to the Eighth Circuit arguing that the TTAB’s determination that there is a likelihood of confusion between the two marks should have been given preclusive effect by the District Court on the claim of trade mark infringement which, in turn, would have necessitated a finding by the District Court in B&B Hardware’s favour. The Eighth Circuit, however, affirmed the District Court’s decision, holding that regardless of whether the TTAB is an agency whose decisions are entitled to preclusive effect, the decision rendered in the opposition proceedings was not so entitled. Specifically, the Eighth Circuit ruled that preclusive effect should not be given to the TTAB decision at issue because the likelihood of confusion test applied by the TTAB when considering B&B Hardware’s opposition to Hargis’ attempt to register the Sealtite mark did not equate to a determination of likelihood of confusion for purposes of analysing a claim for trade mark infringement.

The decision issued by the Eighth Circuit was not without dissent, however. The dissent took the position that when an administrative agency is acting in a judicial capacity and resolves disputed issues of fact which the parties had the opportunity to litigate, the courts should give the decision issued preclusive effect. In short, the dissent believed that Hargis should not have had the opportunity to re-litigate the dispute at the District Court level after already having done so before the TTAB.

This case, therefore, stands for the proposition that a ruling by the TTAB may not be serve as the final decision on the existence of a likelihood of confusion between two marks. However, as indicated by the dissent, the holding in this case may not be universally applied so careful consideration should be given by a trade mark owner when pursuing a claim of trade mark infringement when the marks at issue were already the subject of a TTAB decision.

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Recent Consumer Financial Protection Bureau (CFPB) Developments

Rules Creating Exemptions to the ATR Rule Finalized

The Consumer Financial Protection Bureau (CFPB) recently finalized rules that modified and created specific exemptions to the CFPB’s Ability-to-Repay Rule. The rules have three main effects.

  1. They exempt certain community development lenders and nonprofits—specifically those that lend only to low- and moderate-income consumers, and make 200 or fewer such loans per year—from the ATR Rule.
  2. They facilitate lending by community banks and credit unions that have less than $2 billion in assets, and make 500 or fewer first lien mortgages per year.
  3. They no longer require that compensation paid by a broker or lender to a loan originator counts towards the Dodd-Frank points and fees limits.

These changes to the ATR Rule will take effect on January 10, 2014.

Effective Date of Prohibitions on Financing Credit Insurance Premiums Delayed

The CFPB has delayed the effective date of a regulation prohibiting creditors from financing credit insurance premiums secured by a dwelling. The regulation, previously effective June 1, 2013, has been delayed until January 10, 2014. The CFPB wanted to clarify how the rule applied to transactions other than those where a lump-sum premium was added to the loan amount at closing.

CFBP Seeking Comments on Possible Revisions to the Civil Penalty Rule

The CFPB is seeking comments on possible revisions to the Consumer Financial Civil Penalty Fund Rule. The CFBP uses this fund, established by the Dodd-Frank Act, to deposit civil penalties obtained in judicial or administrative actions under federal consumer financial laws. The fund can be used to pay victims of violations of federal consumer financial laws, or, if victims cannot be found, to educate consumers and provide financial literacy programs. The rule articulates the CFPB’s interpretations of what kind of victim payments are appropriate and how to otherwise allocate the funds. Comments are due on July 8, 2013.

White Paper Concerning Overdraft Practice Concerns Published

The CFPB published a white paper concerning overdraft practice concerns and institutional practices. The paper finds that a large portion of consumer checking account revenue continues to come from overdraft fees. Furthermore, those consumers who choose, let alone use, overdraft coverage have higher costs and a higher chance of having their checking accounts involuntary closed. No action, other than further research, is currently planned.

CFPB Launches New Mortgage Rule Implementation Page

The new mortgage rule implementation page is part of an effort to help lenders comply with the Dodd-Frank Act reforms and CFPB rules. Debtors and potential debtors can find potentially useful information, including quick reference charts, video guides, manuals, etc.—related to the new 2013 mortgage rules. While the CFPB’s intention for the site is to help understand the rules, the materials are not a substitute for the rules themselves.

Ryan C. Fairchild, summer law clerk at Poyner Spruill, co-authored this article.

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A Short-Lived Victory for Generic Drug Manufacturers?

Sheppard Mullin 2012

On June 24, 2012, the U.S. Supreme Court handed down its decision in Mutual Pharmaceutical Co. Inc. v. Bartlett, 570 U.S. ____ (2013), finding that design-defect claims against generic drug companies are pre-empted where federal law prohibits an action required by state law. The Supreme Court had previously held in Pliva v. Mensing, 564 U.S. ____ (2011) that failure to warn claims against generic drug manufacturers are pre-empted by the Federal Food Drug and Cosmetic Act since generic drug makers must copy innovator drug labeling precisely in order to obtain approval of their products by the U.S. Food and Drug Administration (“FDA”). The Court in Mutual rejected the argument of lower courts that the generic manufacturer could comply with both federal and state law by choosing not to make and distribute the product at all.

The case in question involved the drug sulindac, a non-steroidal anti-inflammatory drug product marketed by the innovator as Clinoril®. The plaintiff in the case had been prescribed sulindac for treatment of shoulder pain. She subsequently developed a case of toxic epidermal necrolysis following taking an FDA approved generic product equivalent to Clinoril®, which resulted in significant and permanent disability (including blindness) and disfigurement. Subsequent to the event, the FDA required a more specific warning as to this possible side effect on sulindac products. A jury found the generic manufacturer liable under a theory that there was a design defect with the product, and the First Circuit affirmed, holding that the generic manufacturer could have complied with both federal and state law by not manufacturing and distributing the product. This was the method by which the lower courts overcame prior precedent that a state law may be impliedly pre-empted when it is not possible to comply with both federal and state law.

The Supreme Court in Mutual noted that the generic manufacturer could not comply with the state law, since federal law requires that the active ingredient, the amount of the active ingredient, the dosage form, and the labeling had to be identical to the innovator product. In this case, it was not possible to redesign the product, and the only way, under New Hampshire law, to remedy the design defect would have been to strengthen the product’s warnings. That too could not be done, as FDA rules require the labeling of the generic to be identical to that of the innovator. The Court ruled that in such a case the state law is without effect, and relevant New Hampshire warning-based design defect cause of action was pre-empted with respect to FDA-approved generic drugs sold in interstate commerce.

The scope of the Mutual decision may be limited to those states where design-defect claims allow for a risk-utility approach such as that the New Hampshire requires. The New Hampshire standard requires, among other things in determining whether there is a valid cause of action for a design defect, a determination as to whether there is a possible warning to avoid unreasonable risk of harm from the design defect and the efficacy of such warning. So not every design-defect claim may be pre-empted, depending on each state’s laws are interpreted. But given the Court’s reasoning, even state laws that do not take into effect the presence of and efficacy of a warning, may be pre-empted, as the generic must copy the formula of the innovator in all respects, except for the inactive ingredients in the product. (It should be noted that generics of some dosage forms – ophthalmic products and injectable products – must, in most cases, contain the same inactive ingredients as in the innovator product in the same amounts).

Furthermore, the FDA may amend its rules to permit ANDA holders to make changes in labeling. See “FDA Rule Could Open Generic Drug Makers to Suits,” The New York Times, Business, July 4, 2013, at B2. As stated in the posting on the OMB website (RIN 0910-A694):

Abstract: This proposed rule would amend the regulations regarding new drug applications (NDAs), abbreviated new drug applications (NDAs), abbreviated new drug applications (ANDAs), and biologics license applications (BLAs) to revise and clarify procedures for changes to the labeling of an approved drug to reflect certain types of newly acquired information in advance of FDA’s review of such change. The proposed rule would describe the process by which information regarding a “changes being effected” (CBE) labeling supplement submitted by an NDA or ANDA holder would be made publicly available during FDA’s review of the labeling change. The proposed rule also would clarify requirements for the NDA holder for the reference listed drug and all ANDA holders to submit conforming labeling revisions after FDA has taken an action on the NDA and/or ANDA holder’s CBE labeling supplement. These proposed revisions to FDA’s regulations would create parity between NDA holders and ANDA holders with respect to submission of CBE labeling supplements.

The expected date for a Notice of Proposed Rulemaking is September 2013. It could, of course, take FDA quite some time to propose a rule, and put it into effect, given the requirements of the Administrative Procedure Act. And Congressional action is also a possibility.

For the present, however, generic drug manufacturers appear to be shielded from liability under the doctrine of pre-emption from most, if not all, failure to warn and design defect claims under state law. Whether that victory is short-lived or not remains to be seen.

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Defense of Marriage Act’s Demise (DOMA) – What it Means for Canadian Residents with U.S. Ties

Altro Levy LogoLast week, the US Supreme Court issued an historic and landmark ruling in the case of US v. Windsor. It has been hailed in the media as the demise of the Defense Of Marriage Act (“DOMA”), and celebrated as an extension of more than 1,000 federal benefits to same-sex couples.

In US v. Windsor, Edith Windsor brought suit against the US government after she was ordered to pay $363,000 in US estate tax upon the death of her wife Thea Spyer. Edith and Thea were legally married in Canada in 2007, but the US federal government did not recognize their marriage when Thea passed away in 2009. Under DOMA gay marriage was not recognized, even if it was legal in the jurisdiction where it was performed. This lack of recognition meant that Edith could not take advantage of the marital deduction that would have allowed her to inherit from her wife without paying US estate tax.

In its ruling on June 26th, the US Supreme Court ruled that the US federal government could not discriminate against same-sex married couples in the administration of its federal laws and benefits as previously dictated by DOMA. Same-sex couples, who are legally married in one of the 13 states that recognize gay marriage, or a country like Canada, now have access to the same federal protections and benefits as a heterosexual married couple.

Tax Benefits

The demise of DOMA will bring with it a multitude of changes under US tax law. We will not attempt to enumerate all of them here, though we will provide a brief overview of key changes for our Canadian and American clients.

i. US Estate Tax

The case of US v. Windsor was based on the US estate tax, which is imposed by the US federal government on both US citizens and residents, as well as non-residents who own US assets worth more than $60,000 USD. Currently US citizens and residents with less than $5.25 Million USD in worldwide assets do not owe US estate tax on death. Canadians with worldwide assets of $5.25 Million USD or less receive a unified credit under the Canada-US Tax Treaty that works to eliminate any US estate tax owed on their US property.

Under federal law a US citizen may pass his entire estate to his US citizen spouse tax-free upon death. Up until last week this rollover was unavailable to same-sex couples.

Canadian same-sex couples should now benefit from the Canada-US Tax Treaty provisions that provide a marital credit to the surviving spouse. This allows for a doubling up of credit against any potential US estate tax due on US property. Now a Canadian same-sex spouse can inherit a worldwide estate worth up to $10.5 Million USD and should see little to no tax on US assets due upon the death of the first spouse.

ii. Gift Tax

The US imposes a tax on gifts if they exceed $14,000 USD per recipient per year. There is an exemption for gifts between spouses, which are generally not taxable.

Gifts made in the US between non-US citizen non-resident spouses are taxable, but the annual exemption is $139,000 USD instead of $14,000 USD. Canadian spouses who gift each other US property, US corporate stocks, etc. may gift up to $139,000 USD per year without incurring US gift tax.

These exemptions have now been extended to same-sex couples, expanding their ability to use gifting for tax and estate planning.

iii. US Income Tax

Many Canadians move to the US each year, in part because of the lower personal tax rates. In the US spouses are allowed to engage in a form of income splitting by filing a joint income tax return. By filing jointly, married couples are also generally able to take advantage of further credits and deductions not afforded to individual or single filers. Being able to file jointly can be highly tax advantageous.

Previously, same-sex couples had to file either separately or as head of household. Now they have the option of filing jointly as spouses, and gaining access to the aforementioned income splitting, credits and deductions.

Couples may file up to three years of amended US Income Tax returns if they believe that they would have been entitled to a larger tax return by filing jointly in those years.

iv. Other Tax Benefits

In the US most individuals receive health insurance through their employer at least up until they qualify for US Medicare at age 65. Previously, if the employer sponsored health insurance plan covered the same-sex spouse as well, then it was considered a taxable benefit. Such coverage will now also be tax-free for same-sex couples.

Retirement Benefits

Among the many benefits now extended to same-sex couples are a variety of “Retirement Benefits.”

i. Social Security and Medicare Benefits

With the end of DOMA, same-sex couples may now qualify for retirement, death, and disability Social Security benefits based on their spouse’s qualifying US employment history. For example, same-sex couples that do not have the required US employment history to qualify for US Social Security benefits on their own may now qualify for spousal Social Security benefits based on their spouse’s qualifying employment history. These spousal Social Security benefits are typically equal to 50% of the Social Security benefits received by the spouse with the qualifying employment history.

Additionally, spouses can qualify for US Medicare based on only one spouse’s qualifying US employment. This allows access to premium-free, or reduced-premium, health coverage in retirement.

Previously these important retirement benefits were not available to same-sex spouses.

ii. Individual Retirement Accounts

Important changes to the rights and recognition of spouses under US retirement savings plans result from the end of DOMA. Same-sex couples will now be recognized under 401(k), 403(b), IRA, Roth IRA, and similar plans. Spouses will be required to give their consent for any non-spouse beneficiary designations for these accounts. They will be treated as spouses for purposes of determining required distributions. For example, an inheriting same-sex spouse will not have to begin IRA distributions until age 70 ½, whereas previously he would have had to begin required distributions immediately as would any non-spouse beneficiary.

Immigration

One of the biggest questions after the US Supreme Court’s ruling on DOMA was whether there would be immediate changes to US immigration policy. Previously the US government did not recognize same-sex couples for immigration purposes. This meant that a US citizen spouse could not sponsor his husband for immigration to the US as a permanent resident (a.k.a. green card holder).

Last week, shortly after the ruling on DOMA, Alejandro Mayorkas, the director of US Citizenship and Immigration Services (“USCIS”) announced at the American Immigration Lawyers Association annual conference that the USCIS would begin issuing green cards to qualifying same-sex couples.

As of Friday, June 29, 2013, USCIS began issuing green cards to same-sex spouses. USCIS has stated that it has been keeping a record of spousal green card petitions denied only due to a same-sex marriage for the past two years. It is expected to reopen and reconsider these spousal sponsorship petitions that were previously denied due to same-sex marriage.

Conclusion

The demise of DOMA is exciting news for Americans, and Canadians with US ties. It provides same sex couples a wealth of new tax and estate planning opportunities, not to mention new opportunities for retirement and immigration planning. It is not too early to review your current planning, and take advantage of these changes.

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