Tag: Transportation

LIBOR Benchmark Replacement – “It’s Time to Get Off the SOFR” – An Overview of the Impact of LIBOR Transition on Aircraft Financing and Leasing Transactions

It’s time to face up to the fact that financial market participants will soon no longer be able to rely on LIBOR.

No one can claim that this comes as a surprise. In 2014, in response to concerns about the reliability and robustness of the interest rate benchmarks that are considered to play the most fundamental role in the global financial system, namely LIBOR, global authorities called for the development of alternative “risk free” interest rate benchmarks supported by liquid, observable markets. Notably, in July 2017, the Chief Executive of the UK Financial Conduct Authority (FCA), the authority which regulates LIBOR, made a seminal speech about the future of LIBOR, indicating that market participants should not rely on LIBOR remaining available after 2021. To emphasize the point in the United States, the President and Chief Executive Officer of the New York Federal Reserve famously quipped during a speech in 2019, “some say only two things in life are guaranteed: death and taxes. But I say there are actually three: death, taxes and the end of LIBOR.”

Even the enormous pressures heaped on market participants by COVID-19 have not changed the picture. As the impacts of COVID-19 continue to evolve, there is speculation as to whether the pandemic will delay the projected LIBOR cessation timeline. At the end of March 2020, the FCA confirmed that no such delay was forthcoming, remarking, “The central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and should remain the target date for all firms to meet.”

More recently, the Alternative Reference Rates Committee (ARRC), the working group convened by authorities in the United States, has announced a set of “best practices” for completing the transition from LIBOR. Of particular note is the ARRC’s recommendation that hard-wired fallbacks should be incorporated into loan documentation from as early as 30 June 2020, and the target date for ceasing to write new LIBOR deals should be 30 June 2021.

This article explores the steps already taken by the Loan Market Association (LMA), the ARRC and the International Swaps and Derivatives Association (ISDA), the likely impact of LIBOR benchmark replacement on loan and lease documentation and some of the uncertainties which still fall to be resolved.

LIBOR

LIBOR (the London Inter-Bank Offered Rate) is a rate of interest, ostensibly used in lending between banks in the London interbank market. The LIBOR rate is calculated for various currencies and various terms. In the aviation financing market, 1-month or 3-month USD LIBOR is most commonly used. Note that these rates are forward-looking, are calculated based on repayment at the end of a specified term and represent a rate of interest for unsecured lending.

In aircraft transactions, LIBOR:

  • can form part of the interest (and default interest) calculation in loan agreements;
  • can represent the rate against which floating rate payments under interest rate swap agreements are calculated; and
  • can form part of the default interest calculation in aircraft lease agreements (and, where lease rental calculations are made on a floating rate basis, the determination of rent).

SOFR

A number of alternative benchmarks were considered as suitable replacements for USD LIBOR. The emerging winner, and the ARRC’s recommended alternative, is the Secured Overnight Financing Rate (SOFR). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.

Unlike term LIBOR rates, SOFR is an overnight, secured rate.

Aircraft loan and interest rate swap repayments are not typically made on an overnight basis, so how would we apply an overnight rate to a loan which provides for accrued interest to be paid monthly or quarterly?

In time, it is anticipated that forward-looking term SOFR rates will emerge – this is the stated preference of the ARRC – but this has not happened yet and it is not certain that satisfactory term SOFR rates will be available ahead of LIBOR discontinuation. Therefore, the ARRC does not recommend that financial market participants wait until forward-looking term SOFR rates exist to begin using SOFR in their loans. Instead, a simple average or compounded average of overnight SOFR rates for an interest period might be made to apply in lieu of a term rate.

A further complication with an overnight rate arises because, unlike term LIBOR rates, the amount of interest payable on a loan interest repayment date cannot be calculated until the last day of the applicable loan interest period. This makes loan administration (for banks) and payment processing (for borrowers) complicated. Various alternative calculation conventions remain under discussion. Selecting a final methodology is proving challenging in light of the lack of market convention and the operational challenges faced with making such a calculation.

Credit Adjustment Spreads

Because SOFR is an overnight, secured rate it does not include any term liquidity premium or any bank credit risk element, unlike a term LIBOR rate, where interest is paid at the end of a specified term and which represents an unsecured rate. As a result, SOFR prices lower than LIBOR.

Bankers therefore intend to apply a “credit adjustment spread” on top of SOFR, in order to account for the differences in which LIBOR and SOFR are determined, and in order to limit any transfer of economic value as a result of the transition between benchmark rates. The basis on which a credit adjustment spread is calculated is also the subject of continuing discussion. A further complicating factor for determining the spread adjustment is that the spread between LIBOR and SOFR fluctuates in rather meaningful ways over time. This fluctuation is, in part, due to the fact that Treasuries yields may be pushed down during times of crisis where there is a flight to quality.

LMA and ARRC Slot-in Provisions dealing with LIBOR Transition

The LMA and ARRC have both been working on slot-in drafting for various financial instruments in anticipation of transitioning away from LIBOR.

On 21 December 2018, the LMA issued “The Recommended Revised Form of Replacement Screen Rate Clause and Users Guide”.

On 25 April 2019, the ARRC recommended two sets of fallback language, also for syndicated loan documentation – the “Amendment Approach” fallback language and the “Hardwired Approach” fallback language.

Note that the ARRC has also prepared recommended fallback language for floating rate notes and securitization transactions.

LMA and ARRC Amendment Approach – creating a framework for future agreement

The LMA and ARRC Amendment Approaches (the Amendment Approaches) do not set out the replacement benchmark or credit adjustment spread which should apply, or set out the detailed basis on which interest should accrue or be calculated. Instead, a framework is set out in order to facilitate future agreement and related amendments to the loan documentation.

The LMA Amendment Approach does this by reducing the threshold for lender consent that might otherwise apply to relevant amendments.

The ARRC Amendment Approach provides that the borrower and the loan agent may identify a replacement rate (and spread adjustment), and the required lenders (typically 51%) have five days to object. If the required lenders reject the proposal, the loan goes to a prime-based rate until a successful amendment goes through.

ARRC Hardwired Approach

The alternative, the ARRC “Hardwired Approach”, provides that, when LIBOR ceases, the benchmark rate converts to a specified version of SOFR plus a credit adjustment spread. Failing this, a rate agreed between the parties would apply. Unlike the ARRC Amendment Approach, the Hardwired Approach is also “future-proofed”, to cover further benchmark replacement to the extent this occurs.

The Hardwired Approach sets out a “waterfall” of replacement benchmarks which are to apply – firstly, a term SOFR rate or, failing which, the next available term SOFR rate; secondly, a compounded SOFR rate; and thirdly, an alternative rate selected by the loan agent and the borrower which has given due consideration to any selection or recommendation made by a “Relevant Governmental Body”, or market convention. The credit adjustment spread is added to the applicable replacement benchmark in each case.

The Hardwired Approach also sets out a waterfall of options to calculate the credit adjustment spread – firstly, the adjustment selected or recommended by a Relevant Governmental Body; secondly, the adjustment that would apply to the fallback rate for a derivative transaction referencing the ISDA Definitions to be effective upon an index cessation event with respect to USD LIBOR for a period equal to the relevant loan interest period; and thirdly, an adjustment agreed between the loan agent and the borrower giving due consideration to the factors which apply to determining a replacement rate of interest and set out above.

So, which approach is the aviation industry using? For the time being, we are seeing the Amendment Approaches (or negotiated variations of those approaches) applying, but as noted in the ARRC “best practices” recommendations, this is something which must develop quickly.

The ARRC noted that many respondents to their consultations who prefer the use of the ARRC Amendment Approach at the current time generally believe that eventually some version of the Hardwired Approach will be more appropriate. The Amendment Approaches set out a more streamlined procedure for LIBOR transition, but they leave many of the difficult questions unanswered and provide for additional amendments to be made further down the road. Banks and counterparties will need to consider whether it is feasible to amend thousands of loan documents in short order, and the related disruption this could cause.

ARRC Hedged Loan Approach

Outside of the syndicated loan market, the ARRC recommends a third set of fallback language – the “Hedged Loan Approach”, to be considered for bilateral USD LIBOR loans which benefit from interest rate hedging.

The “Hedged Loan Approach” is the alternative approach for those who want to ensure that the fallback language in their loan agreement is consistent with the fallback language in any corresponding hedge they enter into with respect to their credit facilities. There is no reason that the language cannot be amended to accommodate syndicated loan transactions.

Interest rate swaps are commonly used in aircraft lessor financings in order to mitigate basis risk between operating lease payments (typically calculated on a fixed rate basis) and scheduled interest rate payments under the related loan agreement (typically calculated on a floating-rate basis).

The Hedged Loan Approach aligns the trigger events, replacement rate, and any spread adjustments under a subject loan with those as determined in accordance with the soon-to-be finalized revisions to the ISDA Definitions.

Trigger Events for LIBOR Transition

There is some variation between the trigger events for LIBOR transition between the LMA and ARRC approaches. As you would expect, both cover events relating to an immediate or upcoming LIBOR cessation. Both also include an early opt-in election which may be made by the parties. The ARRC Hedged Loan Approach trigger events are tied to those that will apply under any relevant ISDA documentation.

The LMA has also included a “material change” event, such that a trigger event can apply if the methodology, formula or other means of determining the LIBOR screen rate has materially changed. The LMA offers both objective and subjective language (in the opinion of the Majority Lenders and, where selected, the Obligors) for making the material change determination.

The ARRC includes as an additional event an announcement from the supervisor of a benchmark administrator that the applicable benchmark is no longer representative. This is intended to reflect the requirements of, and the procedures which apply under, the EU Benchmarks Regulation (the BMR). Where such a determination is made, it is possible that the loan parties would want to accelerate LIBOR transition, and EU-supervised entities could be prohibited from referencing LIBOR in new derivatives and securities. U.K. and U.S. authorities have also stated that it might be prudent for market participants to include this pre-cessation trigger in their loan documentation.

The early election triggers that apply under the ARRC Amendment and Hardwired Approaches are also drafted differently. Note that a term SOFR rate only can apply if an early election trigger applies under the Hardwired Approach.

ISDA Benchmarks Supplement

ISDA published its Benchmarks Supplement in 2018 primarily to facilitate compliance with the requirements of Article 28(2) of the BMR, but it has been drafted so that market participants can use it to incorporate fallbacks for reference rates into derivative transactions, whether or not they or the transactions are subject to BMR. The Supplement includes a number of trigger events relating to benchmarks and fallbacks which apply upon the occurrence of one of those triggers. Currently, ISDA has provided for benchmark replacement in two scenarios: (i) a permanent cessation of the then applicable benchmark; or (ii) if applying an applicable benchmark would breach applicable law. These broadly align with the corresponding trigger events in the ARRC documentation, but there are some important variations, discussed below.

Ultimately, ISDA intends to update the ISDA Definitions to include fallbacks to selected alternative interest rate benchmarks, and work on this is ongoing, but in the meantime incorporation of the Supplement into transactions referencing LIBOR could form part of a wider strategy for the transition away from LIBOR, even if it is not required by BMR.

Tensions between the Loan and Derivatives Markets?

As described above, aircraft lessor financings will very often be hedged pursuant to an ISDA Agreement in order to avoid basis risk.

But what if the approach taken by loan markets in relation to the timing for LIBOR transition and the calculation of floating rate interest differs from the approach taken by derivatives markets under swap agreements? Payments are no longer fully hedged and basis risk is re-introduced.

The major issue goes to the rate itself – the ARRC is hoping for term SOFR rates to emerge which will be used to calculate floating rate loan interest payments, but it is almost certain that ISDA will not apply term SOFR rates to floating rate payments under derivatives transactions and a version of compounded SOFR will instead apply.

Trigger events for benchmark replacement also vary between the two markets, but work is ongoing to converge differing approaches.

Under the ISDA Benchmarks Supplement, no early opt-in election applies. This would tend to make it less likely that early opt-in elections for hedged loans would in fact be exercised.

Note also that no pre-cessation trigger event currently applies under the Supplement – so “material changes” to the benchmark calculation (as contemplated by the LMA Amendment Approach), and the non-representativeness test included in the ARRC provisions, are not included as trigger events, albeit that ISDA has consulted on the latter and an amendment to the Supplement to include the non-representativeness test is expected to be published in July.

Since the FCA has already announced the expected procedures that would apply if it were to make a determination that LIBOR was no longer representative and how such a determination would be communicated to the markets, it seems that the ARRC approach towards trigger events would be the preferred approach for hedged loan documentation.

It is also possible that the basis on which credit adjustment spreads are calculated will vary between the two markets but, on this point, it has been the ARRC’s turn to re-consult on the proposal made by ISDA; i.e. that the same spread adjustment value is used across all of the different fallback rates. It is hoped that a consistent credit adjustment spread can be made to apply between loan and derivative markets, although given that there is a range of methodologies for calculating pre-cessation credit adjustment spreads that could apply in loan markets, this might be more difficult to achieve where an early opt-in election is exercised and might make the actual exercise of early opt-in elections less likely for hedged loans.

Where Does That Leave Us?

Thus far, most borrowers/lessees within the aviation finance market have favoured some version of the LMA or ARRC

“Amendment Approach” fallback language in their loan or lease documentation – the advantage being that it does offer flexibility.

Parties have entered into a number of variants but the underlying principle behind the Amendment Approaches appears to be adhered to – it serves as a placeholder to the issue and aims to bring the commercial parties back to the table once the loan market has broadly accepted a replacement standard for LIBOR. Key reasons for this are the absence of a term SOFR rate and an absence of consensus as to the basis on which alternative SOFR rates and credit adjustment spreads might be calculated. People are not yet ready to commit to SOFR or a Hardwired Approach since at the moment no one knows exactly what they might be getting.

Notwithstanding the above, the “Hedged Loan Approach” should not be discounted for bilateral (or syndicated) aircraft lessor financings which are hedged by way of an interest rate swap. Lenders/borrowers that are concerned with “basis risk” upon LIBOR cessation may prefer this approach since it is designed to eliminate any basis risk between the loan and the related hedge. However, it remains to be seen whether loan markets will be able to accommodate a departure from whatever becomes settled loan markets convention, commercially and operationally.

If the floating rate under the swap and the floating rate under the loan are aligned, then the change from LIBOR to a different benchmark should theoretically be cost neutral for that borrower, except where a swap premium is payable as a result of transition to a replacement benchmark rate. The requirement to pay a swap premium may be considered more likely if a swap is required to pay a floating rate that reflects a term SOFR rate or another loan market convention where the same is at odds with the default position in the derivatives market. Commercial parties will follow this issue with particular interest.

Note also that on 6 March 2020, the ARRC released a proposal for New York State Legislation for USD LIBOR contracts, which would operate to replace LIBOR by the recommended alternative benchmark included in the legislation and other related matters.

Operating Leases

Lessors and lessees will need to consider how LIBOR transition is achieved under their operating leases.

Most operating leases do not make provision for LIBOR transition, nor do they provide for a fallback rate in the event of LIBOR cessation beyond requesting reference bank rates (which is not itself an effective fallback, since a shrinking number of reference banks are prepared to quote a rate even now).

At this stage, where LIBOR is referenced in operating leases, it would be prudent for leasing companies to take a similar approach in their operating leases to that taken in the Amendment Approaches referred to above. This will ensure that LIBOR transition triggers are broadly consistent between operating leases and any related financing and hedging arrangements; it will also ensure that appropriate interest calculation methodologies and market approaches can be introduced into operating leases by amendment at the appropriate time.

Where fixed rate operating lease rentals are payable, the parties might also consider an alternative basis on which to calculate default interest under the lease which avoids SOFR and credit adjustment spreads altogether, but this would require careful thought, particularly regarding the way in which this interacts with any upstream financing.

Leasing parties will need to consider an appropriate costs allocation for amendments of existing leases.

Another point to note is that fixed rate operating lease rental calculations are usually constructed from a swap screen rate for an agreed term (taken an agreed number of business days ahead of the rent calculation date), and lease rentals cannot be adjusted after the event.

The swap screen rate will itself have been constructed from an interest rate exchange which assumed that 1-month LIBOR rates would remain available for the duration of the swap period, which means that such correlation as previously existed for leasing companies between outgoings (funding costs) and income (lease rental) is lost. Whether this creates a windfall or a loss for leasing companies will depend on what happens to SOFR rates in the future.

So, some real food for thought and some important decisions lie ahead. Discussions should start now and action should be taken soon in order to ensure an orderly transition.

© 2020 Vedder Price

For more on LIBOR/SOFR see the National Law Review Financial Institutions & Banking law section.

DOT Issues Notice of Enforcement Discretion Regarding the Transportation of Hand Sanitizers to Address COVID-19

On April 2, 2020, the U.S. Department of Transportation (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) issued a Notice of Enforcement Discretion (Notice) that provides temporary relief from certain aspects of the DOT Hazardous Materials Regulations (HMR) that normally apply to the transportation of ethyl alcohol or isopropyl alcohol-based hand sanitizers. [1]

Due to the Coronavirus Disease 2019 (COVID-19) public health emergency, demand for hand sanitizer has reached unprecedented levels. Many of these sanitizers are classified as Class 3 flammable liquids due to the alcohol content, which would trigger certain marking, labeling, packaging, documentation, and other compliance obligations for shippers (and carriers) under the DOT HMR. Although the DOT HMR already provide some regulatory relief for certain ethyl alcohol products in 49 CFR 173.150(g), this does not cover isopropyl alcohol products and it does not cover ethyl alcohol products in larger containers. To facilitate the availability of these products, PHMSA is providing temporary relief from certain HMR requirements.

The Notice indicates that the relief applies to companies producing hand sanitizer under a recently issued Food and Drug Administration (FDA) Guidance document and to those who subsequently transport the hand sanitizer. [2]

Importantly, it applies only to highway shipments (by private, common, or contract carriers by motor vehicle) and not shipments by air, vessel, or rail.

If parties follow the procedures for preparing hand sanitizer for shipment set forth in the Notice (as compared to all of the requirements specified in the HMR), PHMSA will not take enforcement action for violations of the HMR. The Notice provides separate procedures for shipping small quantities (< 1 gallon/container or 8 gallons/package) and for larger quantities (> 8 gallons to 119 gallons/package) of hand sanitizer.

© 2020 Keller and Heckman LLP

For more on manufacture & transportation of emergency medical supplies for the COVID-19 pandemic, see the National Law Review Coronavirus News section.

Lyft Sexual Assault Claims Consolidated for Pre-Trial Proceedings

Lyft and other companies have become a part of life and people look to them for a safe ride home at the end of a night out.   However, ridesharing companies, like Lyft and Uber, have been under fire for passenger safety concerns, and the stories of women being sexually assaulted by their drivers are prolific, harrowing and terrifying.  In response to this disturbing trend, a wave of lawsuits in California are addressing the company’s responsibility when a passenger is assaulted.

Lyft Sexual Assault Claims Consolidated in San Francisco Superior Court

Recently,  California Superior Court Judge Hon. Kenneth Freeman granted a petition to consolidate multiple Lyft sexual assault cases in California recommending the Superior Court of California San Francisco County as the appropriate venue for the “complex” coordinated matters to be heard.

The Lyft passenger lawsuits claim the plaintiffs were sexually assaulted by sexual predators driving for Lyft after Lyft had been on actual notice of ongoing, sexual assaults by its drivers. According to the complaints, Lyft failed to respond to the sexual assaults by adopting and implementing adequate driver hiring or monitoring systems and procedures to protect riders. This failure to respond to an identified, systemic issue of sexual assault put more riders at risk.

The Lyft plaintiffs filed a motion to coordinate the cases, as most of the cases included in the ruling had been filed in San Francisco Superior Court.  The court agreed with the Lyft plaintiffs that: Lyft’s corporate headquarters are in San Francisco, as are the majority of corporate witnesses and documents.   The court added, the San Francisco Superior Court uses e-filing, which could potentially save the parties significant costs.  Additionally, only cases that are “complex” as defined by California’s Judicial Council standards may be coordinated.

Need for ESI (Electronically Stored Information)  Orders, Are Lyft Drivers are Independent Contractors or Employees, Additional Plaintiffs Joining Requires Complex Case Management

Co-Counsel for the Lyft Sexual Assault Plaintiffs, Brooks Cutter of Cutter Law argued that there are likely to be thousands of documents, studies, e-mails, and memoranda that are relevant to the claims and defenses in this case and discovery will inevitably require a complex ESI (Electronically Stored Information) order and accordingly a court like San Francisco Superior Court is well-equipped to handle such issues, including staying discovery, staying portions of the case, obtaining stipulations that apply to the entire coordinated case, and selecting bellwether plaintiffs.

Many of the underlying cases in the consolidation action allege vicarious liability or the liability of Lyft for the torts or wrongful actions of their drivers whether or not Lyft classifies them as an employee or independent contractor.  Lyft, Uber, and Doordash are actively fighting California Assembly Bill 5 Pledging over $90 Million To Fund Voter Initiative To Overturn AB-5  which went into effect January 1, 2020.  AB-5 profoundly alters the legal standard applied in evaluating whether a worker is classified as an employee or an independent contractor.   Furthermore,  Uber and Postmates on December 31st  filed a legal challenge in Federal Court alleging AB-5 violates individuals’ constitutional rights, seeking declaratory and injunctive remedies claiming the law unfairly discriminates against technology platforms and those who make a living through them.

Lyft has also been accused of stalling and slowing down discovery. Coordinated proceedings could help plaintiffs’ attorneys combat Lyft’s delays, and it could be beneficial to have one judge see how Lyft has conducted itself in discovery.

Attorney Cutter stated he is aware of five more related sexual assault cases that have been filed in the time since that petition was filed.   According to attorney Cutter, “There are definitely victims who have not yet come forward.”

Lyft Fought Against Sexual Assault Lawsuit Consolidation

Lyft, represent by Williams & Connolly, argued that the consolidation of  Lyft Sexual assault cases “would make in San Francisco Superior Court a national clearinghouse for claims against San Francisco-based companies.”    Furthermore, Lyft contended that:

“all claims against a California based-company —wherever the underlying incidents arise, and however much the disputed facts occurred elsewhere and other states’ laws govern the contested legal issues — could be brought in California courts and coordinated.”

Lyft’s two main objections to consolidation are that “the allegations of misconduct are not the same and that the majority of the cases did not occur in California.”

Judge Freeman, however, disagreed with the company, focusing instead on Lyft’s actions or inactions as an organization to protect rider’s safety. “To the contrary, the predominating legal and factual issues will examine Lyft’s liability for allegedly failing to institute a system to have prevented the assaults in these cases and potential future assaults.” Judge Freeman said. “The court agrees with plaintiffs that this is not a case against the drivers; it is fundamentally a case against Lyft.”

Significance of Lyft Consolidation Ruling

Judge Freeman also found that coordination of the suits would make the most efficient use of court resources and avoid duplicative testimony. In giving his ruling he further noted that there is a risk of duplicative and inconsistent rulings if the cases were not coordinated, which would create confusion, and it would hinder the Court of Appeal’s ability to hear challenges to inconsistent rulings, orders, and judgments, which would inevitably cause significant delays.

“This is an important ruling for victims as it means the claims will be heard in a single court in California,” plaintiff’s co-counsel Brooks Cutter said. “Lyft opposed our motion and wanted to force victims to undergo litigation in separate courts across the country. As a California company, it is appropriate for these Lyft claims to be heard in California.”

The Lyft sexual assault and rape claims each allege that the company did not adequately address the issue of sexual misconduct committed by sexual predators who drove for the ride-sharing company. Furthermore, they allege Lyft owed that duty to its riders, who believed it offered a safe form of transportation.  Attorney Cutter says, “The occurrence of sexual assault in the vast majority of these lawsuits is undisputed. The focus of these lawsuits is Lyft’s accountability for the assaults, which plaintiffs contend were enabled by Lyft’s lax background checks and failure to enact reasonable in-app monitoring to help ensure rider safety.”

Alexandra LaManna, a spokeswoman for Lyft, disclosed to the New York Times: in 2019 nearly one in five employees at the company had been dedicated to initiatives strengthening the rideshare platform’s safety, and that in recent months Lyft had introduced more than 15 new safety features.  Lyft announced in September of 2019 some of these safety features: access to 911 through the app and monitoring and offers of support from Lyft personnel to the driver and passenger if a trip is experiencing an unexpected delay.  These are on top of the company’s criminal background checks, steps to prevent fraudulent use of the app and identify driver identity, and harassment prevention programs.

However, despite these steps, more Lyft lawsuits are being filed, alleging the ride-sharing company has not taken adequate steps to protect riders from sexual assault.

Lyft has not Released a Safety Report – Lyft Victims Can Still File Lawsuits

In December 2019, Lyft competitor Uber released a safety report.  Uber reported that in 2017 and 2018 it received reports of 5,981 incidents of sexual abuse.  In 2018, this included 235 rapes and 280 reports of attempted rape, 1,560 reports of groping, 376 reports of unwanted kissing to breast, buttocks or mouth and 594 reports of unwanted kissing to another body part.  Because Uber’s figures are based on the information it received, the actual numbers could in fact be higher than reported.

Lyft has not released its safety report regarding sexual assaults, rapes, and accidents. Attorney Cutter finds the lack of safety report from Lyft to be problematic.  He says, “It is important for Lyft to issue a safety report so the public has a better understanding of the significant risk of sexual assault in rideshare vehicles.”

Victims who suffered sexual assault committed by a Lyft driver are still eligible to file a lawsuit. Consolidation of the current lawsuits does not prevent future lawsuits from being filed, and it is likely there are many more victims who have yet to come forward about their experiences.

Copyright ©2020 National Law Forum, LLC

More on consolidated case litigation in the National Law Review Litigation and Trial Practice section.

Airbus to Pay Unprecedented $3.9 Billion for Multinational Bribery, FCPA Violations

Last week, the Department of Justice (DOJ) announced the largest deferred prosecution agreement for violations of the Arms Export Control Act (AECA), International Traffic in Arms Regulations (ITAR), and Foreign Corrupt Practices Act (FCPA) in history. Airbus SE, a French aircraft company, agreed to pay over a combined $3.9 billion to the DOJ as well as authorities in France and the UK for foreign corruption and bribery charges. The penalty is the largest of its sort and is the result of anti-fraud efforts across the three countries.

Airbus engaged in corruption for several years, offering bribes to foreign officials and misreporting to authorities to conceal the bribes. These violations of the Arms Export Control, International Traffic in Arms, and FCPA encompass activities in the United States, UK, France, and China. The crimes also include corruption in defense contracts.

According to a DOJ Press Release, Airbus will pay $527 million to the United States for the company’s violations of the International Traffic in Arms and Foreign Corrupt Practices Acts. In this case, Airbus self-reported and voluntarily cooperated with law enforcement after uncovering violations in an internal audit. It is possible an internal report initiated the audit. Cooperation and remedial measures by Airbus were taken into consideration in the settlement terms of the deferred prosecution agreement and benefitted Airbus.

International whistleblowers are crucial to the detection of large-scale corruption and fraud around the world. The SEC and DOJ rely on individuals who decide to anonymously and confidentially blow the whistle on violations of the FCPA. The FCPA allows for foreign nationals to file whistleblower claims in the US and receive an award between 10 and 30 percent of the total amount recovered by the government if a successful enforcement action follows their disclosures.

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.
For more bribery cases, see the National Law Review Criminal Law & Business Crimes section.

Seventh Circuit: ADA Does Not Prohibit Discrimination Based on Future Impairments

On October 29, 2019, railway operator Burlington Northern Santa Fe Railway Company (“BNSF”) prevailed before the United States Court of Appeals for the Seventh Circuit – which covers Illinois, Indiana, and Wisconsin – in a case in which the company argued that its refusal to hire an obese candidate due to an unacceptably high risk that the applicant would develop certain obesity-related medical conditions incompatible with the position sought did not violate the Americans with Disabilities Act (“ADA”).

Ronald Shell applied for a job with BNSF as a machine operator position.  Per its standard practice when the applied-for position is safety-sensitive, as was the heavy equipment operator position sought by Shell, BNSF required him to undergo a medical examination.  During the medical examination, the examiner determined that Shell’s body mass index (“BMI”) was 47.  BNSF had a practice of refusing to hire individuals with a BMI higher than 40 for safety-sensitive positions.  In Shell’s case, the employer expressed concern that his obesity, although not causing any present disability, would cause Shell disabilities in the future, such as sleep apnea, diabetes, and heart disease.  BNSF asserted that this risk was significant because a sudden onset of any of these conditions could be catastrophic for a heavy machine operator.  BNSF therefore did not place Shell in the position.

Shell sued, arguing that he was “disabled” under the ADA’s definition of that term because BNSF had “regarded him as” having a disability.  The ADA not only protects individuals who are actually disabled or have a record of being disabled, but also protects individuals who have been subjected to an adverse employment action because of an actual or perceived physical impairment, whether or not that impairment substantially limits a major life activity.  Shell argued that by refusing to hire him based on the risk of future disabilities that he was at risk of as a result of his obesity, BNSF essentially treated him as though he currently had those conditions.

The Court ruled that the ADA does not protect non-disabled employees from discrimination based on a risk of future impairments.  The Court cited precedent from the Eighth Circuit, where BNSF also faced challenges to its practice of refusing to hire obese applicants due to the risk of future impairments.  The Eighth Circuit, like the Ninth and Tenth Circuits, also has held that the statutory language of the ADA does not protect non-disabled individuals who have a risk of disability in the future.

Of note, Shell also argued at the trial court level that his obesity constituted an actual disability, rendering BNSF’s refusal to hire him based on this characteristic a violation of the ADA for this reason as well.  However, as you may recall from our blog post from earlier this year, just a few months ago, the Seventh Circuit addressed this argument in another case, Richardson v. Chicago Transit Authority, and held that obesity, by itself, is not a disability for purposes of the ADA unless it is caused by an underlying physiological disorder.  Shell did not present any evidence in his case of such an underlying disorder, and thus could not, therefore, claim that he was actually disabled.  Notably, the federal appellate courts are split on this issue, which may tee it up for consideration by the United States Supreme Court in the future.  In contrast, among the appeals courts that have addressed the issue of future disabilities, all have agreed, thus far, that the ADA’s reach does not extend to potential or likely future disabilities of currently non-disabled individuals.

© Copyright 2019 Squire Patton Boggs (US) LLP

For more ADA litigation, see the National Law Review Labor & Employment law page.

When Birds Finally Find a Nest

If you’ve walked outside your office building or downtown condo over the past few months, you’ve probably seen electric scooters parked on sidewalks, in bike racks, in the street, on the steps, or even in a local tree. To some, their presence in the urban landscape is but a mere inconvenience, simply ignored as they walk to their car parked a few feet away. To others, their presence generates a hatred so powerful residents find their cause worthy of protesting to their local city council, recklessly throwing the scooters into local waterways, and even starting an Instagram account with over 100,000 followers dedicated to their destruction. But cities around the globe have come to realize that although their presence can be alarming and uncomfortable to some, finding a solution to make them coexist with residents, pedestrians, and commuters will be an essential component of their urban fabric.

As we mentioned in our September 20, 2018 blog post, Have Electric Scooters Pushed Cities Too Far?, many scooter companies have taken the “dark of night” approach when arriving in new cities, often arriving without notice or much consult with local regulators. In response to this strategy, cities like Ann Arbor, Michigan and Indianapolis, Indiana instituted outright bans on the presence of ride-sharing scooters entirely. In some cases, after negotiations with these cities, Birds, Limes, and Spins were allowed back to the cities in small numbers and in highly regulated instances. In other cases, the scooters remained banned with no relief for the companies or residents in sight.

In many cities which opted to ban and continue to ban these scooters, the biggest issue has been parking and reckless driving by commuters and joyriders alike. Understandably, the presence of this new form of transit, intermixed with pedestrian walking space in a seemingly overnight fashion has made some pedestrians cautious and warry while walking to their favorite restaurants. If you read the local news in cities and towns where scooters are abundant, you might think that accidents are commonplace and injuries abundant. A recent UCLA study concluded that over a one year period, scooters contributed to almost 250 injuries with only 4% of riders wearing a helmet. On the other hand, a recent CDC study concluded that only one in every 5,000 scooter rides results in injury. A similar study conducted by the City of Portland found bicycles were involved in more accidents over a four month period compared to scooters, but the study conceded that bike rides often are in greater abundance and longer distance, making the comparison a bit more difficult to verify.

In an effort to build in a ground-up change in rider behavior, many scooter companies have looked to incentivize responsible riders for proper parking and penalize irresponsible riders for poor parking and riding between trips. Bird has recently started rolling out a per-ride credit to riders who park their scooters in geofenced parking areas designated for scooters. Similarly, scooter companies Lime, Bird, and Spin have allowed non-riders to report improperly parked scooters or reckless riders. In an effort to work in tandem with the scooter companies, many cities are encouraging riders to share the road with cars by incorporating protected bike lanes and resurfacing roadways to accommodate scooters and bikers alike. Similarly, some cities like Kansas City, Missouri and Santa Monica, California have repurposed on street parking spaces capable of holding one car with scooter specific parking, capable of holding up to 20 scooters each. Incorporating these parking solutions into the city scape has resulted in 46% greater compliance with parking ordinances than prior to their implementation.

© 2019 Foley & Lardner LLP
For more urban transportation issues, see the National Law Review Utilities & Transport law page.

Politics Trumps Economics? Trump’s Revocation of California’s Waiver Under the Clean Air Act

Today President Trump announced on Twitter that the U.S. was revoking California’s waiver under the Clean Air Act (CAA) which allowed it to impose stricter tailpipe emission standards than the federal ones. California’s Governor Newsom and Attorney General Becerra immediately announced that the state would file suit to challenge the revocation.

While the revocation has been characterized as an immediate rollback, the federal corporate average fuel economy (CAFE) standards[1] established under the previous administration, which are consistent with California’s, remain in place. Last year the Trump administration proposed to rollback those standards, freezing the efficiency and emission rules in 2021 and canceling further increases in stringency set through 2028. The final rule has not yet been issued. It is rumored that it will not be, as the administrative record supporting it has many problems and most acknowledge that it faces significant legal hurdles.

A little historical context is helpful. California began regulating tailpipe emissions in the 1960’s under then-Governor Reagan to combat air pollution. When the CAA was signed by President Nixon in 1970 it included a provision, Section 209, that allows California to establish stricter standards by obtaining a waiver of the normal federal preemption rules from U.S. Environmental Protection Agency (EPA). Once granted, other states then can adopt California’s standards. Thirteen states and the District of Columbia have adopted California’s current standards.

For 30 years, under both Republican and Democratic administrations, Section 209 waivers to combat air pollution were routinely granted. In April 2007, the U.S. Supreme Court decided Massachusetts v. EPA, 549 U.S. 497 (2007), ruling that greenhouse gases (GHGs) are pollutants under the CAA. In December 2007, the Bush administration denied California’s request for a waiver to impose tailpipe emission standards aimed at reducing GHGs. California promptly sued in January 2008, joined by 11 other states. That case was pending before the U.S. Supreme Court when President Obama took office. In 2009, the parties settled the case before the Court issued its decision, and in 2010 the U.S. and California reached an agreement that aligned the state and federal standards. Those standards were subsequently expanded and a new waiver was granted in January 2013. It is that waiver that is now being revoked.

While litigation is inherently uncertain, it appears that California has a good case for challenging the revocation. Not only is the revocation unprecedented, there is no provision in the CAA providing for it. Section 209 only establishes the criteria for granting a waiver; it’s silent as to revocation. In 2013, the U.S. determined that the criteria for the waiver had been met, and both the states and the industry have acted in reliance on that determination for more than 6 years. The U.S. has also asserted that the federal Energy Policy and Conservation Act (EPCA) preempts California’s standards. However, in Massachusetts v. EPA, the Supreme Court ruled that EPCA does not displace EPA’s authority to regulate GHGs, and courts subsequently have extended that rationale to hold that EPCA does not preempt states’ regulation of GHGs under the waiver.

Just as it was in the late aughts, the automobile industry has been put in an extremely difficult position by this dispute. California has the 5th largest economy in the world, and when one adds in the 13 other states that have adopted its standards – states like New York and Pennsylvania – that equates to a large segment of the auto market. Having to produce vehicles to meet two different sets of emission standards would be extremely costly. The industry desperately needs regulatory certainty. Reflecting this, in June, 17 automakers sent a letter to President Trump calling for one national standard that included California, and in July, four automakers reached an agreement of sorts with California on emission standards.

Instead of the regulatory certainty that is needed for the economy to operate efficiently, it appears that this dispute will move into a phase of protracted litigation and years of regulatory uncertainty. The dispute may be good politics for those that want to motivate their base on each side, both Republicans in Washington D.C. and Democrats in Sacramento, but it is pretty clearly bad economics.

[1]   CAFE is, essentially, the average fuel efficiency of an automaker’s fleet of vehicles.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

For more on the Clean Air Act, see the National Law Review Environmental, Energy & Resources law page.

Heavy Metal Murder Machines and the People Who Love Them

What is the heaviest computer you own?  Chances are, you are driving it.

And with all of the hacking news flying past us day after day, our imaginations have not even begun to grasp what could happen if a hostile person decided to hack our automotive computers – individually or en masse. What better way to attack the American way of life but disable and crash armies of cars, stranding them on the road, killing tens of thousands, shutting down functionality of every city? Set every Ford F-150 to accelerated to 80 miles an hour at the same time on the same day and don’t stick around to clean up the mess.

We learned the cyberwarfare could turn corporal with the US/Israeli STUXNET bug forcing Iran’s nuclear centrifuges to overwork and physically break themselves (along with a few stray Indian centrifuges caught in the crossfire). This seems like a classic solution for terror attacks – slip malicious code into machines that will actually kill people. Imagine if the World Trade Center attack was carried out from a distance by simply taking over the airplanes’ computer operations and programing them to fly into public buildings.  Spectacular mission achieved and no terrorist would be at risk.

This would be easy to do with automobiles. For example, buy a recent year used car on credit at most U.S. lots and the car comes with a remote operation tool that allows the lender to shut off the car, to keep it from starting up, and to home in on its location so the car can either be “bricked” or grabbed by agents of the lender due to non-payment. We know that a luxury car includes more than 100 million lines of code, where a Boeing 787 Dreamliner contains merely 6.5 million lines of code and a U.S. Airforce F-22 Raptor Jet holds only 1.7 million lines of code.  Such complexity leads to further vulnerability.

The diaphanous separation between the real and electronic worlds is thinning every day, and not enough people are concentrating on the problem of keeping enormous, powerful machines from being hijacked from afar. We are a society that loves its freedom machines, but that love may lead to our downfall.

An organization called Consumer Watchdog has issued a report subtly titled KILL SWITCH: WHY CONNECTED CARS CAN BE KILLING MACHINES AND HOW TO TURN THEM OFF, which urges auto manufacturers to install physical kill switches in cars and trucks that would allow the vehicles to be disconnected from the internet. The switch would cost about fifty cents and could prevent an apocalyptic loss of control for nearly every vehicle on the road at the same time. (The IoT definition of a bad day)

“Experts agree that connecting safety-critical components to the internet through a complex information and entertainment device is a security flaw. This design allows hackers to control a vehicle’s operations and take it over from across the internet. . . . By 2022, no less than two-thirds of new cars on American roads will have online connections to the cars’ safety-critical system, putting them at risk of deadly hacks.”

And if that isn’t frightening enough, the report continued,

“Millions of cars on the internet running the same software means a single exploit can affect millions of vehicles simultaneously. A hacker with only modest resources could launch a massive attack against our automotive infrastructure, potentially causing thousands of fatalities and disrupting our most critical form of transportation,”

If the government dictates seat belts and auto emissions standards, why on earth wouldn’t the Transportation Department require a certain level of security of connectivity and software invulnerability from the auto industry.  We send millions of multi-ton killing machines capable of blinding speeds out on our roads every day, and there seems to be no standard for securing the hackability of these machines.  Why not?

And why not require the 50 cent kill switch that can isolate each vehicle from the internet?

50 years ago, when Ralph Nader’s Unsafe at Any Speed demonstrated the need for government regulation of the auto industry so that car companies’ raw greed would not override customer safety concerns.  Soon after, Lee Iacocca led a Ford design team that calculated it was worth the horrific flaming deaths of 180 Ford customers each year in 2,100 vehicle explosions due to flawed gas tank design that was eventually fixed with a tool costing less than one dollar per car.

Granted that safety is a much more important issue for auto manufacturers now than in the 1970s, but if so, why have we not seen industry teams meeting to devise safety standards in auto electronics the same way standards have been accepted in auto mechanics? If the industry won’t take this standard-setting task seriously, then the government should force them to do so.

And the government should be providing help in this space anyway. Vehicle manufacturers have only a commercially reasonable amount of money to spend addressing this electronic safety problem.  The Russian and Iranian governments have a commercially unreasonable amount of money to spend attacking us. Who makes up the difference in this crital infrastructure space? Recognizing our current state of cyber warfare – hostile government sponsored hackers are already attacking our banking and power systems on a regular basis, not to mention attempting to manipulate our electorate – our government should be rushing in to bolster electronic and software security for the automotive and trucking sectors. Why doesn’t the TSB regulate the area and provide professional assistance to build better protections based on military grade standards?

Nothing in our daily lives is more dangerous than our vehicles out of control. Nearly 1.25 million people die in road crashes each year, on average 3,287 deaths a day. An additional 20-50 million per year are injured or disabled. A terrorist or hostile government attack on the electronic infrastructure controlling our cars would easily multiply this number as well as shutting down the US roads, economy and health care system for all practical purposes.

We are not addressing the issue now with nearly the seriousness that it demands.

How many true car–mageddons will need to occur before we all take electric security seriously?

Copyright © 2019 Womble Bond Dickinson (US) LLP All Rights Reserved.

This article was written by Theodore F. Claypoole of Womble Bond Dickinson (US) LLP.
For more on vehicle security, please see the National Law Review Consumer Protection law page.

Second Circuit Deepens Split with Third Circuit Over Aviation Safety Field Preemption, Awaiting Possible Supreme Court Resolution

There is no greater issue currently facing the aviation bar than whether the Federal Aviation Act (“FAAct”) preempts state law by occupying the entire field of air safety. In other words, do federal standards of care exclusively govern liability in the aviation industry, or are states allowed to govern aspects of aviation safety through a patchwork of unique tort or regulatory liability regimes? This question is the subject of a petition for writ of certiorari pending before the U.S. Supreme Court, seeking review of the Third Circuit’s decision in Sikkelee v. Precision Airmotive (2016). In Sikkelee, the Third Circuit concluded that Abdullah v. American Airlines – in which it previously held in the context of in-air operations that “federal law establishes the applicable standards of care in the field of air safety, generally, thus preempting the entire field from state and territorial regulation” – did not apply to state product liability claims concerning the design of aircraft engines.[1] The Supreme Court has asked the U.S. Solicitor General to weigh in on this important question.

Most recently, while the Sikkelee cert petition is pending, the Second Circuit decided Tweed-New Haven Airport Authority v. Tong (2019). In Tweed, the Court of Appeals doubled down on its prior holding in Goodspeed Airport v. East Haddam Inland Wetlands & Watercourses Commission (2011) that the FAAct occupies the “entire field of aviation safety” to the “exclusion of state law” and consequently preempts state laws that sufficiently interfere with federal regulation of air safety. Though the Third Circuit in Sikkelee tried to distinguish and reconcile such other broad field preemption decisions, the analytical split between them – made even more visible in Tweed – is unmistakable. The resultant uncertainty is antithetical to the very purposes of the FAAact – to create a uniform system of federal regulation for aviation industry participants. Tweed thus underscores the need for the Supreme Court to grant certiorari and resolve the split.

The Second Circuit’s Approach to Field Preemption

In Goodspeed, a small privately owned airport sought a declaratory judgment that local environmental and wetlands laws were preempted by the FAAct. The Second Circuit affirmed a “thorough and well-reasoned” district court decision using a two-step analysis for field preemption. The first step asks whether Congress intended the entire field to be occupied by federal law to the exclusion of state law. If so, the second step considers whether the state law in question sufficiently intrudes upon that field.

Applying the two steps, the Second Circuit had little difficulty concluding first that “the overall statutory and regulatory scheme” under the FAAct is “evidence of ‘a clear congressional intent to occupy the entire field of aviation safety to the exclusion of state law,’” because it “has established a comprehensive regulatory scheme ‘addressing virtually all areas of air safety,’ including the certification of aircraft, most airports, pilots and mechanics, air traffic control systems, air navigation and communication, and airspace classifications.” In so holding, the Court noted that it was joining the First, Third, Sixth, Ninth, and Tenth Circuits.

Turning to the second question, the Goodspeed Court considered whether the state environmental and wetland law at issue, which simply required a permit before cutting down trees in protected wetlands, “sufficiently interferes with federal regulation that it should be deemed preempted.” Examining the purpose and effect of the state law, the Court found that the law did not sufficiently enter into the scope of the preempted field: “Goodspeed Airport is not licensed by the FAA; it is not federally funded, and no federal agency has approved or mandated the removal of the trees from its property. Indeed, in its response to a formal inquiry from the district court, in this case, the federal government disclaimed any authority to order the trees’ removal.” In other words, as the district court had explained below, “Courts have long distinguished between state laws that directly affect aeronautical safety, on the one hand, and facially neutral laws of general application that have merely an incidental impact on aviation safety.”

In Tweed, the Second Circuit applied the same, two-step analysis in considering whether a state law preventing the expansion of an airport runway was impliedly field preempted. Tweed is a small commercial Airport. Its largest runway is currently 5,600 feet long making it one of the shortest commercial airport runways in the country, substantially limiting commercial flights. In 2002, Tweed had prepared a Master Plan with Federal Aviation Administration (“FAA”) involvement for upgrading its airport, including extending the runway. In 2009, however, the Connecticut legislature enacted a statute expressly blocking the expansion of the runway. In response, Tweed filed a declaratory judgment action seeking a determination that the statute was preempted by the FAAct. The district court rejected Tweed’s arguments, finding that Tweed lacked standing to sue, and that, even if it had standing, the FAAct did not preempt the statute. The Second Circuit reversed, finding both standing and preemption.

With regard to preemption, the Court of Appeals first reiterated the Goodspeed holding that the FAAct “was enacted to create a uniform and exclusive system of federal regulation in the field of air safety. . . . It was passed by Congress for the purpose of centralizing in a single authority . . . the power to frame rules for the safe and efficient use of the nation’s airspace.” Consequently, it reasoned, state laws that conflict with the FAAct “or sufficiently interfere with federal regulation of air safety are preempted.”

Thus turning to the second step in the analysis, the Court considered whether the statute fell within the scope of the preempted field. It found that the statute directly impacted air safety by limiting the length of the runway, which in turn limited the number of passengers, amount of baggage, and even the type of planes that could use the airport. The Court also considered the extent of FAA involvement with Tweed overall and with the length of the runway specifically, concluding that the “FAA’s involvement with Tweed and its runway project has been direct and significant.” As the Court explained, Tweed is federally regulated as part of the Tweed-New Haven Airport Layout Plan, which requires approval by the FAA. Additionally, as a primary commercial service airport, Tweed needs to hold an operating certificate pursuant to federal regulations. It is required to submit its Master Plan to the FAA, which, as early as 2002, included a plan for extending the length of the runway. The FAA directly approved the Master Plan, including the extension of the runway. For all these reasons, the Court held that the state law was preempted.

The Third Circuit’s Conflicting Approach

In Abdullah v. American Airlines (1999), the Third Circuit similarly considered whether the FAAct preempted the field of air safety thus barring a tort claim premised on an alleged failure by aircraft crew to warn passengers of expected turbulence. The Plaintiffs alleged negligence by the pilot and flight crew for failing to either avoid the turbulent conditions or warn the passengers so they could protect themselves. The Court of Appeals found implied field preemption based on its conclusion that the FAAct and relevant federal regulations “establish complete and thorough safety standards for interstate and international air transportation that are not subject to supplementation by or variation among, jurisdictions.” Indeed, the Third Circuit expressly distinguished its holding from those in which courts had only found preemption of “discrete aspects of air safety,” explaining that “federal law establishes the applicable standards of care in the field of air safety, generally, thus preempting the entire field from state and territorial regulation.”

Despite the breadth of this express holding in Abdullah, the Third Circuit subsequently held in Sikkelee that the FAAct does not preempt state law aviation product liability claims. The plaintiff had alleged that a design defect in the carburetor of an airplane engine resulted in the aircraft crashing shortly after takeoff. Examining whether that claim was subject to implied field preemption, the Third Circuit did not use the Second Circuit’s two-step analysis, but instead essentially conflated the inquiries, focusing entirely on whether there was pervasive enough federal regulation addressing the particular aviation safety aspect at issue to rebut the general presumption against preemption.

In that regard, the defendants pointed to the extensive certification process required by the FAA in order to receive a type certificate for the engine: “This certification process can be intensive and painstaking, for example, a commercial aircraft manufacturer seeking a new type certificate for wide-body aircraft might submit 300,000 drawings, 2,000 engineering reports, and 200 other reports in addition to completing approximately 80 ground tests and 1,600 hours of flight tests.” As the defendants explained, the type certificate “certifies that a new design for an aircraft or aircraft part performs properly and meets the safety standards defined in the aviation regulations,” and any changes to the design thereafter must be approved by the FAA. A “major” change to the type certificate requires the issuance of an amended or supplemental type certificate. The defendants argued that, because a type certificate applicant goes through such a rigorous regulatory process culminating in the certification of a part as meeting safety standards defined in the aviation regulations, the question of whether a part design was reasonably safe under state law was preempted by the FAAct.

The Third Circuit disagreed. Focused on the general presumption against preemption, the Court of Appeals considered the fact that “aviation torts have been consistently governed by state law” as far back as 1914. It also read the text of the FAAct as “not signal[ing] an intent to preempt state law products liability claims.” The Third Circuit dismissed the extensive regulations addressing the engine design and certification process as merely establishing “a baseline requirement” for “minimum standards.”

In thus holding that the FAAct did not impliedly preempt the field of aviation safety pertaining to engine certification, the Third Circuit tried to distinguish and reconcile its approach to field preemption with that of other Courts of Appeals, including the Second Circuit: “Appellees observe that various Courts of Appeals have described the entire field of aviation safety as preempted, but, on inspection, even those courts have carefully circumscribed the scope of those rulings. The Second, Ninth, and Tenth Circuits all assess the scope of the field of aviation safety by examining the pervasiveness of the regulations in a particular area rather than simply determining whether the area implicated by the lawsuit concerns an aspect of air safety.”

Not so. Again, for example, the Second Circuit has not started its analysis by “examining the pervasiveness of the regulations in a particular area” of aviation. In direct conflict with Sikkelee, the Second Circuit through Tweed has now twice readily found at the outset of its analyses that the FAAct impliedly preempted the “entire” field of aviation safety. Only thereafter has the Second Circuit examined the state law at issue to determine if it sufficiently intruded into the preempted field (Tweed), or, rather, was merely incidental to it (Goodspeed).

This fundamental difference in analyzing field preemption belies the Third Circuit’s attempt to distinguish product liability cases (Sikkelee) from in-air operations (Abdullah). Indeed, the Second Circuit acknowledged no such distinction in Tweed, and in its predecessor, Goodspeed, the Court affirmed the district court’s “thorough and well-reasoned” explanation that, in response to the FAAct’s “congressional mandate, the FAA has established a comprehensive regulatory scheme addressing virtually all areas of air safety, including the certification of aircraft.” Thus, unlike the Third Circuit, the Second Circuit would not start its analysis of a case involving engine product liability by examining whether the pervasiveness of aircraft design and certification regulations sufficiently evinces an intent to overcome a general presumption against preemption, but, rather, by yet again recognizing field preemption over all aspects of aviation safety – including engine design – and would then ask whether the state tort standards of care at issue sufficiently intrude upon the scope of that field. In that regard, we think the Second Circuit would have little difficulty concluding that they do. Like the extent of federal involvement with the physical layout of the airport in Tweed, the level of federal involvement in engine design and certification is indisputably “direct and significant,” such that state tort law standards of care that purport to govern the safety of engine design clearly intrude upon it.

Conclusion

The fundamental and critical circuit split on the proper analysis of implied field preemption in aviation cases, illustrated and emphasized most recently by Tweed, undermines the very purpose of the FAAct of creating uniform and consistent standards of care for safety in the aviation industry. We hope the Supreme Court will grant certiorari and resolve it.

[1] The Third Circuit remanded the case for consideration of conflicts preemption and on subsequent review of the district court’s determination that the product liability claims were conflict preempted, it reversed and remanded for further proceedings. The pending cert petition seeks review of both preemption rulings. This article, however, is focused solely on field preemption.

© 1998-2019 Wiggin and Dana LLP

For more aviation cases, see the National Law Review Utilities & Transport type of law page.

Drive.ai Introduces External Communication Panels to Talk to Public

Self-driving cars are inherently presented with a challenge—communicating with their surroundings. However, Drive.ai has attempted to address that challenge by equipping its self-driving cars with external communication panels that convey a variety of messages for drivers, pedestrians, cyclists and everyone else on the road. Drive.ai CEO Bijit Halder said, “Our external communication panels are intended to mimic what an interaction with a human drive would look like. Normally you’d make eye contact, wave someone along, or otherwise signal your intentions. With [these] panels everyone on the road is kept in the loop of the car’s intentions, ensuring maximum comfort and trust, even for people interacting with a self-driving car for the first time.” To help the company build its platform, one of the company’s founders recorded herself driving around normally and analyzed all the interactions she had with other drivers, including eye contact and hand motions.

Specifically, the panel uses lidar sensors, cameras, and radar to determine if any pedestrians are in or near a crosswalk as it approaches the crosswalk. If the vehicle detects that pedestrian’s path, the car begins to slow down and displays the message “Stopping for you.” Once the vehicle comes to a complete stop, it displays the message “Waiting for you.” When there are no more pedestrians are detected, the vehicle will display the message “Going now, please wait” to let other pedestrians to wait to cross.

Drive.ai continues to conduct research to determine the best means of communication including the best location for such communications, which is currently right above the wheels based on its previous studies. Halder said, “The more you can effectively communicate how a self-driving car will act, the more confidence the public will have in the technology, and that trust will lead to adoption on a broader scale.”

 

Copyright © 2019 Robinson & Cole LLP. All rights reserved.
More more in vehicle technology advances, see the Utilities & Transport page on the National Law Review.