GC Agenda: March 2023

Antitrust

FTC’s Proposed Rule on Non-Competes

Counsel for companies should be aware of the FTC’s proposed rule banning non-compete restrictions in employment agreements. If made effective, the proposed rule would make most non-compete agreements illegal under federal law.

A non-compete agreement is any term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, when the employment ends. The proposed rule would make non-compete agreements unfair methods of competition under Section 5 of the FTC Act and prohibit employers from entering into or enforcing post-employment non-compete agreements with paid or unpaid workers, including:

The proposed rule contains an exception for certain non-compete restrictions entered into in merger agreements. It would also not apply to most non-profit entities, including non-profit health care systems and universities, which are generally exempt from the FTC Act. However, some state laws already ban non-compete agreements even for non-profit entities, such as in California, North Dakota, and Oklahoma.

The final FTC rule would go into effect within 60 days of publication and require compliance, including removal of existing non-compete clauses, 120 days later. However, potential legal challenges to the rule, or a change in administration, could result in its stay or removal.

In addition to monitoring developments regarding the proposed rule, counsel should:

(For more on the proposed rule, see FTC Tackles Non-Compete Restrictions on Practical Law and The FTC’s Proposed Rule Banning Employee Non-Competes in the February 2023 issue of The Journal; for more on enforcing non-compete clauses, see Antitrust Considerations in Merger Agreement Non-Compete Clauses on Practical Law.)

DOJ’s Withdrawal of Health Care Guidance

The DOJ recently withdrew three policy statements related to antitrust enforcement in health care markets. All three policy statements were issued jointly with the FTC, which has not announced a similar intention to withdraw the guidance.

The withdrawn policy statements include:

Companies should avoid relying on these statements when structuring business activities until there is more clarity on the DOJ’s approach to these issues. In particular, companies should avoid relying on safe harbors contained in the withdrawn statements, such as certain safe harbors for information sharing and joint purchasing arrangements, because it is uncertain whether the DOJ considers these safe harbors to be valid.

The DOJ has also recently withdrawn its Merger Remedies Manual (issued Sept. 2020). The DOJ and FTC have withdrawn several policy statements and pieces of formal guidance in recent years, creating ambiguities for advising businesses on key issues such as information sharing, joint purchasing arrangements, and merger remedies.

(For more on the implications of the policy statement withdrawal, see DOJ Withdraws Health Care Antitrust Guidance, Highlights Information Sharing Concerns on Practical Law; for a collection of resources to assist counsel on antitrust issues in health care matters, see Health Care Competition Toolkit on Practical Law.)

Arbitration

Mandatory Employee Arbitration

California companies may require arbitration agreements as a condition of employment despite Assembly Bill 51, the state law that made it a criminal offense for employers to do so.

In Chamber of Commerce of the U.S. v. Bonta, the Ninth Circuit held that the Federal Arbitration Act preempts a California statute that banned companies from requiring that current employees and applicants consent to what the statute calls “forced arbitration” of certain claims as a condition of employment. This decision effectively enjoins enforcement of the statute, which the court described as discriminating against arbitration by discouraging or prohibiting the formation of an arbitration agreement.

Counsel should monitor states’ continued efforts to limit companies’ ability to require prospective and current employees to waive their right to litigate work-related disputes in court, and should exercise caution when drafting mandatory arbitration clauses and seeking employee consent to those clauses.

(For more on drafting a California-compliant employee arbitration clause, see Mandatory Arbitration of Employment-Related Claims (CA) on Practical Law; for information on seeking judicial assistance to compel or stay arbitration in California, see Compelling and Staying Arbitration in California on Practical Law.)

Bankruptcy & Restructuring

Pre-Bankruptcy Divisional Mergers

A recent Third Circuit decision highlights important considerations for companies that use divisional mergers as a pre-bankruptcy strategy.

In In re LTL Management, LLC, the Third Circuit held that a debtor created under a divisional merger (commonly known as the Texas Two-Step), which was allocated the company’s tort-related liabilities, was not eligible for bankruptcy relief because it was not in financial distress on its bankruptcy petition date. Specifically, prior to bankruptcy, Johnson & Johnson Consumer Inc. split itself into two new entities under Texas law:

LTL was allocated approximately $373 million in assets, and the divisional agreement gave LTL the right to cause the new Johnson & Johnson Consumer Inc. and its parent company to pay LTL cash to satisfy any talc-related costs and expenses. There were few conditions and no repayment obligation. Two days after its formation, LTL filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court for the Western District of North Carolina.

The bankruptcy court transferred the case to the US Bankruptcy Court for the District of New Jersey, which denied motions to dismiss filed by talc claimants. After a direct appeal to the Third Circuit, the court held that:

At the time of its filing, LTL had large potential liabilities, but the bankruptcy court’s projections had not properly considered that LTL had reasonably good chances of successfully defending against many of the talc-related lawsuits.

While not directly addressing the validity or value of the Texas Two-Step, this decision indicates that this pre-bankruptcy strategy will be examined closely for debtor eligibility, at least in the Third Circuit. The decision shows an unwillingness to accept the debtor’s worst-case-scenario projections and an unwillingness to allow a debtor to avail itself of the advantages of the bankruptcy system (such as consolidation of all claims into one court) simply because the putative debtor desires it.

(For more on this decision, see In re LTL Management, LLC: Third Circuit Holds Texas Two-Step Bankruptcy Not Filed in Good Faith When Debtor is Not in Financial Distress on Practical Law.)

Capital Markets & Corporate Governance

Executive Compensation Disclosure

Companies should take note of a recent SEC enforcement action against McDonald’s Corp. for insufficient disclosure regarding the departure of CEO Steve Easterbrook.

According to the SEC’s order, McDonald’s terminated Easterbrook for exercising poor judgment and engaging in an inappropriate personal relationship with a McDonald’s employee in violation of company policy. However, McDonald’s and Easterbrook entered into a separation agreement that concluded his termination was without cause, which allowed Easterbrook to keep equity compensation that would otherwise have been forfeited. In making this conclusion, McDonald’s exercised discretion that was not disclosed to investors. In its proxy statement filed after entering into the separation agreement, McDonald’s disclosed that Easterbrook was terminated without cause and described the terms of the separation agreement, including the equity compensation it permitted Easterbrook to retain.

The SEC’s order found that by failing to disclose that the company exercised discretion in treating the termination as without cause, despite Easterbrook’s violations of company policy, McDonald’s failed to provide material executive compensation disclosures under Item 402 of Regulation S-K, which violated Section 14(a) of the Exchange Act and Exchange Act Rule 14a-3.

The SEC’s position on disclosure may prove challenging for companies when balancing conflicting demands in drafting public disclosure. When an executive leaves, the disclosure of their departure is often heavily negotiated and there may be facts that the company is unable to disclose. However, this enforcement action puts companies on notice of the SEC’s disclosure expectations, and companies may have to include more detailed disclosure than previously accepted.

(For more on the enforcement action, see SEC Settles Charges Against McDonald’s and Its Former CEO for Disclosure Violations on Practical Law; see also Duty of Oversight for Corporate Officers below; for more on proxy statements and executive compensation disclosure, see Proxy Statements and Preparing the Executive and Director Compensation Disclosure for the Proxy Statement and Form 10-K on Practical Law.)

Commercial Transactions

Corporate Enforcement and Voluntary Self-Disclosure Policy

The Criminal Division of the DOJ recently revised the Foreign Corrupt Practices Act (FCPA) Corporate Enforcement Policy, now known as the Corporate Enforcement and Voluntary Self-Disclosure Policy (CEP).

The CEP now applies to all FCPA cases and other corporate criminal matters handled by the Criminal Division. Under the CEP, when a company voluntarily self-discloses misconduct to the DOJ, fully cooperates, and timely and appropriately remediates, there is a presumption that the company will receive a declination of prosecution.

Under the former policy, a declination of prosecution was only available absent aggravating circumstances involving the seriousness of the offense or the nature of the offender. Under the CEP, a company that voluntarily self-discloses misconduct, even when aggravating circumstances exist, will be eligible for a declination of prosecution (although not as a presumption), if the following conditions are met:

If it is determined that a criminal resolution is still warranted despite self-disclosing misconduct, fully cooperating, and timely and appropriately remediating, the DOJ has the authority to reduce the company’s fine up to 75%, up from a maximum of 50% under the former policy.

(For more on the CEP, see The Corporate Enforcement Policy and DOJ Makes Changes to Corporate Enforcement Policy on Practical Law; for a collection of resources to assist counsel in complying with anti-bribery and anti-corruption laws and regulations, including the FCPA, see Bribery and Corruption Toolkit on Practical Law.)

Employee Benefits & Executive Compensation

End of COVID-19 National Emergency and Public Health Emergency

Employers and their employee benefit plan administrators should be aware that the Biden administration has announced plans to formally end the COVID-19-related national emergency (NE) and public health emergency (PHE).

After briefly extending both the NE and PHE, the Biden administration intends to end these emergencies on May 11, 2023 (with certain NE-related provisions ending in July 2023). The end of the NE and PHE will affect certain substantive requirements for plans and compliance deadline relief for plan participants.

The NE and PHE, which were announced by the Trump administration in early 2020:

As the pandemic proceeded, federal legislation and administrative guidance for benefit plans associated with the NE and PHE:

The end of the NE and PHE could lead plan sponsors and administrators to change certain benefit provisions associated with the emergencies (for example, a plan could be less generous regarding how it reimburses OTC COVID-19 tests once the PHE expires). If so, the plan may need to timely issue summaries of material modifications (or updated summary plan descriptions) to reflect these changes.

(For more on this development, see White House Announces Continuation of COVID-19 National Emergency and May 11 End Date on Practical Law; for more on the how the NE and PHE affect employee benefits administration, see COVID-19 Compliance for Health and Welfare Plans on Practical Law.)

SECURE 2.0 Act

Companies that sponsor retirement plans should be aware of the changes under the SECURE 2.0 Act of 2022 (Act), which contains some of the most significant changes to retirement plans in over a decade.

Changes that become effective on the Act’s enactment date (or for taxable years beginning after December 29, 2022) include:

Future effective dates apply to additional changes including:

Plan sponsors and counsel should:

(For more on the Act, see SECURE 2.0 Act Makes Comprehensive Changes to Retirement Plans and SECURE 2.0 Act Compliance Chart on Practical Law.)

Finance

CFDL Final Regulation

The New York State Department of Financial Services (NYDFS) recently adopted a final regulation to implement the New York State Commercial Finance Disclosure Law (CFDL).

Under the final regulation and the CFDL, companies that offer commercial financing less than or equal to $2.5 million are required to make standardized disclosures about the commercial financing’s credit terms.

New York State enacted the CFDL in December 2020 (and amended it in February 2021) to address the lack of any standardized federal framework for how lenders provide information about offers of commercial financing. The NYDFS issued a pre-proposal draft of a proposed regulation to implement the CFDL in September 2021, followed by a revised proposed regulation one year later (2022 proposed CFDL regulation).

The final CFDL regulation makes several modifications to the 2022 proposed CFDL regulation, including changes related to:

The final CFDL regulation requires that when a provider or a broker uses the term “interest,” it must describe an annualized percentage rate. It also allows electronic recipient signatures on all disclosures received. The 2022 proposed CFDL regulation only permitted a recipient’s electronic or facsimile signatures for a commercial financing consummated electronically.

The final CFDL regulation went into effect on February 1, 2023. The compliance date is August 1, 2023.

(For more on the final CFDL regulation, see NYDFS Issues Final Regulation to Implement New York Commercial Finance Disclosure Law (CFDL) on Practical Law.)

Health Care

Health Equity

Counsel should be aware of an increased emphasis on health equity in the health care industry and should advise health care organizations to address health inequities as a critical element of business strategy, resource investment, and mission fulfillment.

Health equity addresses patient disparities with the goal of increasing affordability, accessibility, and diversity to influence care and outcomes. The COVID-19 pandemic and other recent events underscored the immense health inequities that exist. In response, the Centers for Medicare and Medicaid Services (CMS):

CMS also created a framework to advance health equity in all of its programs over the next decade with five priorities, including:

The Joint Commission (TJC) recently added health equity as a Leadership Standard for accreditation and will elevate it to a National Patient Safety Goal on July 1, 2023, to be on par with other patient safety components.

TJC, CMS, and other federal agencies require organizations to account for health equity improvement. Providers and facilities should use the five CMS priorities to focus their own efforts. Hospitals should conduct a self-assessment to determine:

(For more on the necessary policies and procedures a health care board should adopt to better reflect the communities and patient populations served, see Health Care Board Diversity Checklist on Practical Law.)

Intellectual Property & Technology

NFTs and IP

Companies and their counsel must understand the potential impact of non-fungible tokens (NFTs) on their IP portfolios in light of the tightly coupled nature of this emerging technology and IP rights.

NFTs are revolutionizing the way digital assets are protected and monetized. Failure to understand NFT technology and account for associated IP rights can result in significant risks, including:

Companies without internal NFT expertise should consult with outside experts to address potential NFT issues by identifying areas of risk and developing appropriate solutions. These solutions should specifically address:

Companies should also ensure that future agreements in which they license IP permit the right to use the IP in connection with NFTs. Companies may also want to assess whether historical license agreements include broad rights that would sweep in use related to NFTs.

(For more on IP protection and NFTs, see NFTs and Intellectual Property in the February 2023 issue of The Journal.)

Labor & Employment

Off-Duty Recreational Cannabis Use

Employers with California employees should be aware of a recently enacted California law (AB 2188) that prohibits discrimination against an employee or applicant for their off-duty and off-premises cannabis use.

California is the latest jurisdiction to enact laws to protect the employment rights of recreational cannabis users. Employers can and should still have policies prohibiting employees from possessing, using, or being impaired by cannabis while on duty or in the workplace, including when working remotely.

The new law, with limited exceptions, specifically:

Covered employers that would like to continue cannabis testing in 2024 should:

Before January 1, 2024, covered employers should also:

The new law is effective January 1, 2024.

(For more on California employment law issues arising from medical and recreational cannabis legalization, see Marijuana Issues in the Workplace (CA) on Practical Law; for information on medical and recreational cannabis use under other state and local laws, see Medical and Recreational Marijuana State and Local Laws Chart: Overview on Practical Law.)

Litigation

Duty of Oversight for Corporate Officers

Corporate officers should ensure they have sufficient reporting systems in place in light of a recent Delaware Court of Chancery decision that applied the duty of oversight to officers of a US corporation for the first time. Until this decision, courts had exclusively applied this duty to directors.

In In re McDonald’s Corp. Stockholder Derivative Litigation, the court denied a motion to dismiss the shareholder derivative plaintiffs’ Caremark claim that alleged the Global Chief People Officer of McDonald’s had breached his duty of oversight by allowing a culture of sexual harassment and misconduct to persist at the company.

The duty of oversight requires fiduciaries to exercise good faith in both:

The court held that the duty of oversight applies equally to officers and directors and that the complaint had sufficiently pled the defendant officer’s breach of that duty.

This decision recognizes that the scope of an officer’s duty of oversight is not necessarily as broad as that of directors, who oversee the corporation as a whole. An officer’s duty of oversight is limited to the officer’s area of responsibility. For example, the chief legal officer is responsible for legal oversight and the chief financial officer is responsible for financial oversight.

Caremark claims remain among the hardest for shareholder derivative plaintiffs to successfully plead, in part because the complaint must plead that the defendant acted in bad faith, which requires allegations that they knew they were abdicating their fiduciary obligations.

(For more on duty of oversight claims, see Litigating Caremark Claims in a Shareholder Derivative Action on Practical Law; see also Executive Compensation Disclosure above.)

Real Estate

Energy Efficient Real Estate

Commercial real estate owners and operators should closely monitor the rapidly evolving state and local laws designed to combat climate change through energy efficient real estate.

An increasing number of cities and states throughout the US have introduced new environmental sustainability and energy efficiency requirements for commercial real estate, including:

While these initiatives may result in long-term operating cost savings for both owners and tenants, the upfront costs to retrofit existing buildings to comply with these laws may be significant and can result in disputes between landlords and tenants about who bears these costs. Owners should review existing leases and lease forms to:

Failure to comply with these requirements can possibly result in substantial monetary fines and, in some cases, imprisonment for submitting materially false information. Commercial real estate owners and operators should:

(For more on building emissions, energy efficiency, and C-PACE laws in select states and cities, see Recent Developments in Building Emissions and Energy Efficiency Laws (Commercial Real Estate) (Select States and Cities) and Climate Change Laws and Legal Updates Toolkit (Commercial Real Estate) on Practical Law.)

Tax

Stock Repurchase Excise Tax

The IRS and the Treasury Department recently released Notice 2023-2, which provides interim guidance on the 1% excise tax on certain stock repurchases.

Under Internal Revenue Code (IRC) Section 4501, the excise tax applies to the fair market value (FMV) of stock repurchased after December 31, 2022 by “covered corporations” (and certain affiliates). Covered corporations are generally publicly traded US corporations (not including regulated investment companies and real estate investment trusts). The FMV of stock repurchased during a taxable year is determined on a net basis, allowing reductions for the FMV of stock issued by the corporation during the year, including as compensation.

A repurchase subject to the excise tax includes:

Highlights of the Notice include that: