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The CPSC this month issued notices to multiple consumer product companies explaining that the CPSC “recently discovered that nonpublic manufacturer information identifying your company by name along with product model name and/or model number was released in error to the public without following the procedures of 15 U.S.C. § 2055,” which provides procedures for and restrictions on the Commission’s public disclosure of manufacturer and product-specific information. The notice offers few details about the unauthorized disclosure’s nature or scope, raising questions about whether the released data comes from inspections, product safety investigations, recalls, consumer safety complaints or other possibly confidential or commercially sensitive information. This kind of disclosure may have a chilling effect going forward on the candor encouraged between the CPSC and regulated companies by Section 6(b) of the Consumer Product Safety Act.
Lawyers from Hunton Andrews Kurth LLP’s insurance coverage practice report on a recent recall insurance dispute:
Nebraska’s highest court recently issued a holding, in Meyer Nat. Foods LLC v. Greater Omaha Packing Co., 302 Neb. 509 (2019), that highlights the importance of obtaining adequate insurance, or requiring that another party in the supply chain obtain proper insurance, which spells out coverage for all potential recall risks. In the case, Meyer Natural Foods LLC and Greater Omaha Packing Company, Inc. (GOP) entered into a processing agreement, under which GOP agreed to slaughter Meyer’s cattle and process the beef. Under the terms of the agreement, GOP agreed to test the processed beef for the presence of E. coli. Additionally, GOP agreed that it would “maintain property insurance on Meyer Natural Angus Property in its possession, with a total value of $1,800,000.”
After processing and shipping a batch of Myer’s beef, GOP obtained test results indicating 17.5% of the shipment was contaminated with E. coli. Myer recalled the trucks of beef and filed suit against GOP, asserting various claims, including breach of contract based on allegations that GOP failed to obtain and maintain property insurance on the value of Myer’s property as required by the processing agreement. Specifically, Myer complained that GOP’s insurance policy contained an exclusion of coverage for damage resulting from E. coli. Myer argued that the processing agreement’s insurance requirements were not satisfied because the agreement did not permit the exclusion of insurance for E. coli risks.
The trial court granted summary judgment in favor of GOP, holding that GOP carried the required property insurance because the agreement did not require GOP to carry E. coli contamination coverage. In March 2019, the Supreme Court of Nebraska affirmed summary judgment in favor of GOP based on its finding that the policy language was “void of any requirements regarding the inclusion of E. coli coverage or the prohibition of exclusions contained within the insurance policy.” As noted by the Nebraska Supreme Court, courts will not “rewrite a contact to reflect the court’s view of a fair bargain,” which is something parties should keep in mind when requiring insurance for recall risks.
Total Recalls: 27
Hazards: Fire/Burn/Shock (9); Injury (5); Violation of Federal Standard (4); Choke (3); Fall (2); Death (2); Carbon Monoxide (1); Crash (1)
As reported on the Hunton Employment & Labor Perspectives Blog on May 14, 2019, Massachusetts’ highest court, The Supreme Judicial Court (“SJC”), recently issued its long awaited decision in Sullivan v. Sleepy’s LLC, SJC-12542, in which the SJC responded to certified questions of first impression from the United States District Court for the District of Massachusetts.
Introduced by the architect of California’s existing paid sick leave law, AB 555 would expand paid sick leave to require employers to provide 40 hours, or 5 days, of sick leave by the employee’s 200th calendar day of employment. Additionally, employers are only able to cap the amount of paid sick leave a worker earns to 80 hours, or 10 days. Finally, the employer is required to allow an employee to carry over up to 5 days of sick leave into the following year of employment. This proposed amendment would necessarily have a negative impact on California retailers, both large and small. The bill and its amendments can be found here.
California’s existing sick leave law, the Healthy Workplace Healthy Family Act of 2014 (AB 1522), was signed by the governor and went into effect on July 1, 2015. The act requires all employers (regardless of size), except those with collective bargaining agreements, to provide any employee who has worked in California for 30 or more days with paid sick leave at an accrual rate of one hour for every 30 hours worked. After the 90th day of employment, employees are allowed to utilize their paid sick leave to care for themselves or a family member. Pursuant to the act, any unused sick leave accrued in the preceding year is carried over to the next year up to a cap. All employees are entitled to paid sick leave including temporary, seasonal and part-time employees.
The California Chamber of Commerce and numerous California organizations oppose the proposed expansion of California’s sick leave policy for a myriad of reasons, including the financial burden it will place on employers and the superfluous nature of the amendment when considered alongside the existing leave options offered to California employees. Currently, it is estimated that unscheduled absenteeism costs roughly $3,600 per year for each hourly employee in the state. (See “The Causes and Costs of Absenteeism in The Workplace,” a publication of workforce solution company Circadian.) Because the existing law applies to all California employers regardless of size, it necessarily follows that small businesses will be hit the hardest by any change that would increase the number of sick days an employee may take. Moreover, California already offers employees a variety of options for paid leave, whether it be under the California Family Rights Act (CFRA), pregnancy disability leave; domestic violence, sexual assault and stalking leave; harassment leave; bone marrow/organ donor leave; or the Paid Family Leave program. Each of these options is offered in addition to leave protected under the Family and Medical Leave Act (FMLA). As such, it would appear that additional leave offered by this amendment is both costly and unnecessary.
The enforcement of the proposed extension to sick leave also begs the question of whether the new law will preempt local ordinances which have independently expanded upon the existing law. Cities like Los Angeles, San Francisco, Berkeley and Oakland have enforced requirements of varying degrees which affect an employee’s use of accrued sick leave. As drafted, it is unclear how this amendment will affect—or completely preempt—local sick leave ordinances.
As drafted, this amendment is opposed by approximately 30 California organizations, including the California Retailers Association.
We will continue to monitor and provide updates on this amendment, and other legislative developments, throughout the legislative session.
A recent successful effort by a public company to exclude an environmental proposal from its proxy statement may signal a new approach for boards of directors to consider when managing shareholder proposals. Because retailers and consumer products companies routinely receive shareholder proposals on environmental and sustainability issues, similar arguments for exclusion may be persuasive to the staff of the Securities and Exchange Commission (SEC) in the future.
Activist shareholders have made use of SEC Rule 14a-8 to force shareholder referenda on all manner of issues, with those dealing with environmental, social and governance issues among the most popular. Rule 14a-8 provides that any shareholder who has continuously held at least $2,000 in market value or 1 percent of a public company’s common stock for at least one year can submit a proposal for inclusion in a public company’s proxy statement, subject to certain exceptions and exclusions. While such proposals rarely receive majority support once ballots are tallied, they nonetheless have become a popular advocacy tool for environmental activists and other special interest groups seeking to effect broad change at public companies, including retailers and consumer products companies.
When a public company receives an eligible shareholder proposal, it has four options: (1) include the proposal in the proxy statement; (2) negotiate with the proponent to secure a withdrawal; (3) seek a ruling on the proposal’s propriety in federal district court; or (4) seek an interpretive ruling from the SEC staff, known as a no-action letter, that the company may exclude the proposal. Litigation is an expensive and rarely utilized option, so companies desiring to exclude a proposal for which a negotiated withdrawal is unobtainable usually petition the SEC staff for a no-action letter. The process is a highly technical one. Whether the SEC staff will permit a proposal to be excluded often turns on subtle nuances in wording in the proponent’s resolution and supporting statement.
One of the widely used grounds for excluding a shareholder proposal is the ordinary business exception. Rule 14a-8(i)(7) allows a company to exclude a shareholder proposal that deals with matters that are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” Proposals that focus on “sufficiently significant” policy issues that transcend ordinary business, however, may not be excluded under this exception.
In the past, the SEC staff has conducted its own analysis to determine whether it believes a shareholder proposal is “sufficiently significant.” Two recent SEC Staff Legal Bulletins, SLB 14I and SLB 14J, place more responsibility on boards, stating that “the board of directors is generally in a better position to determine” these “difficult judgment calls.”
On March 13, 2019, SEC staff issued a no-action letter to MGE Energy permitting it to exclude a shareholder proposal that requested a report “describing how [the company] can provide a secure, low-cost energy future for their customers and shareholders by eliminating coal and moving to 100% renewable energy by 2050 or sooner.” MGE sought to exclude the proposal under Rule 14a-8(i)(7) because it related to the company’s ordinary business operations. The staff agreed, finding that “the Proposal seeks to micromanage the Company by seeking to impose specific methods of implementing complex policies in place of management as overseen by its board of directors.” Reliance on the board’s analysis seems to be a critical component of the staff analysis.
In its original no-action request, MGE sought to exclude the proposal under Rule 14a-8(i)(7) for three main reasons. First, MGE argued that the proposal sought to micromanage the company by requiring shareholder involvement in determining the kind of technologies the company must utilize to meet an arbitrary time frame of 2050. Additionally, MGE argued that the proposal failed to transcend day-to-day operations of the company. The company acknowledged that the proposal dealt with an important policy issue, but argued it should still be excluded because it sought to impose a quantitative, time-bound target that would require management to abandon its judgments on company business.
Most notably, MGE noted in its request that its board of directors had considered the proposal in conjunction with MGE’s existing policies and found that it was not in the best interest of the company. The letter named several additional considerations the board took under advisement when considering the proposal. After conducting a “complex and thoughtful analysis,” the board ultimately concluded that the proposal was not in the best interest of the company or its shareholders.
In a response letter on February 1, 2019, the proponents urged the SEC staff to reject MGE’s arguments that it could exclude the proposal under Rule 14a-8(i)(7). The proponents argued that because it involved climate change, an important social issue that transcended day-to-day business, the proposal did not micromanage the company. Proponents also argued the proposal transcended the day-to-day business of the company because it set a specific long-term goal related to a significant policy issue to which the company must respond. They cited various jurisdictions and major events throughout the United States that highlighted the “urgency of the issue of decarbonization.” Moreover, the proponents rejected the company’s use of the board’s analysis, calling it “irrelevant.”
In a subsequent response to the SEC staff, MGE contested the proponents’ assertion that the board’s conclusion was irrelevant to the staff’s decision. The company pointed to Staff Legal Bulletin 14I, which calls for a consideration of “whether the company has already addressed the issue in some manner,” including considering the differences “between the proposal’s specific request and the actions the company has already taken.” The company argued that the board’s analysis was relevant to this question because the company already had implemented environmental and sustainability goals for 2050, which the board considered in its determination that the “proposal did not present a significant policy issue to the Company.” MGE also pointed to SLB 14J, noting that the company’s shareholders voted on a nearly identical proposal by the proponents in 2018, which received minimal support, a key factor in evidencing that rank-and-file shareholders had little interest in the matter. In its conclusion, the company asked the staff to reject the proponent’s characterizations of the proposal and allow for its exclusion under Rule 14a-8(i)(7) for the same reasons it articulated in its original letter.
Although the staff’s response letter permitting MGE to exclude the proposal is terse (as is customary), the following language is critical to understanding the staff rationale: “[T]he Proposal seeks to micromanage the Company by seeking to impose specific methods of implementing complex policies in place of management as overseen by its board of directors.”
For various reasons, very few other companies seeking no-action relief have sought to provide a detailed board analysis of a particular shareholder proposal under the ordinary business exclusion. While the SEC staff has clarified that such an analysis is not required, by providing a detailed summary of the board’s deliberations the MGE experience provides a roadmap to other boards of directors considering the propriety of similar proposals, in both the kinds of matters to deliberate and how to present those deliberations to the SEC staff.
Nautilus Inc., which owns exercise brands like Nautilus and Bowflex, and ICON Health & Fitness, which owns NordicTrack among other exercise brands, have been battling over intellectual property for years. ICON recently upped the ante by bringing a complaint to the International Trade Commission, seeking to exclude all imported Bowflex exercise machines from entry into the United States.
These companies have a history. ICON sued Nautilus in 2006, alleging infringement of ICON’s treadmill patents. That case was quickly settled, and the parties avoided patent litigation for ten years. That peace was broken in 2016, when Nautilus sued ICON for failing to pay royalties on a patent license, and separately for infringing Nautilus’ elliptical machine patents. The dispute over licensing royalties ended in Nautilus’ favor, with a $1.8 million judgment at trial in 2018, which was affirmed by the Fifth Circuit earlier this year.
The patent dispute, however, is ongoing, and continues to grow. In 2016, ICON challenged Nautilus’ patents at the USPTO, filing petitions for inter partes review, and requests for reexamination, arguing that the patents were invalid. Many of Nautilus’ patent claims survived those challenges, and Nautilus’ infringement case against ICON is now moving forward.
Separately, in 2017, Nautilus went to the USPTO to challenge ICON’s patents covering elliptical machines and magnetic resistance machines. Many of ICON’s patent claims survived those challenges, and ICON has now filed a complaint in the International Trade Commission, based on those surviving patent claims. ICON is accusing Nautilus’ Bowflex exercise system of infringing ICON’s patents on magnetic resistance machines. If ICON is successful, Bowflex machines will not be allowed into the country.
These two fitness companies are battling it out for patent supremacy in every major patent venue: federal district court, the USPTO, and now, the ITC. It remains to be seen which side will find the advantage.
The ongoing Utah case on patent infringement is Nautilus, Inc. v. ICON Health & Fitness, Inc., 1:17-cv-00154 (D. Utah). The ITC case is In re Certain Cardio-Strength Training Magnetic-Resistance Cable Exercise Machines and Components Thereof, Docket No. 337-TA-3380 (pending institution), with a companion case ICON Health & Fitness v. Nautilus, Inc., 3:19-cv-05217 (W.D. Wash.).
On April 17, 2019, the United States Environmental Protection Agency (EPA) issued a final “significant new use rule” (SNUR) prohibiting over one dozen uses of asbestos from returning to the marketplace without EPA review and approval.
The uses of asbestos subject to the SNUR are:
adhesives, sealants, and roof and non-roof coatings;
extruded sealant tape and other tape;
filler for acetone cylinders;
friction materials (with certain exceptions);
high-grade electrical paper;
separators in fuel cells and batteries;
vinyl-asbestos floor tiles;
any other building material; and
any other use of asbestos that is neither ongoing nor already prohibited under the Toxic Substances Control Act (TSCA).
These uses were identified by EPA as “discontinued,” meaning that they are no longer in the marketplace. But the SNUR effectively bans those uses from returning to the marketplace by requiring that EPA be given the opportunity to “evaluate each intended use . . . for potential risks to the health and the environment and take any necessary regulatory action, which may include a prohibition.” Any company seeking to manufacture or import any product falling into one of the categories subject to the SNUR must notify EPA at least 90 days in advance in order to allow EPA to evaluate the proposed use, and no manufacture or import may occur unless and until EPA has made an official determination.
EPA promulgated the SNUR under the authority of TSCA, which underwent a major overhaul in 2016 and has been used by EPA in recent years to issue new chemical regulations, as well as to strengthen and expand existing regulations. In December 2016, EPA selected asbestos as one of the first ten “high priority” substances to undergo risk evaluations under TSCA. EPA then outlined its proposed approach to its asbestos risk evaluation in a “problem formulation” document released in June 2018. While EPA has not yet published its draft risk evaluation for asbestos, the SNUR provides important insight into how EPA’s approach has changed since it published its problem formulation document nearly one year ago.
Importantly, EPA’s SNUR indicates that only the following “ongoing” uses of asbestos are currently subject to EPA’s risk evaluation:
imported raw bulk chrysotile asbestos for the fabrication of diaphragms (used in chlorine and sodium hydroxide production);
sheet gaskets (used in chemical production, e.g. titanium dioxide production);
brake blocks used in oil drilling equipment;
aftermarket automotive brakes/linings and other vehicle friction products; and
Although cement products, woven products, and packings were originally included in EPA’s problem formulation for asbestos, EPA notes in the SNUR that it has since determined those uses are no longer ongoing and therefore will not be included in EPA’s forthcoming risk evaluation. This shift in EPA’s approach raises significant questions about whether and to what extent other changes have been made since EPA released its problem formulation document, meaning that companies should be on high alert when EPA releases its draft risk evaluation, which could lead to further regulations. The draft asbestos risk evaluation is expected sometime in 2019.
The National Advertising Division (“NAD”) has recommended that Goya Foods, Inc. toss claims that its Excelsior brand pasta is “Puerto Rico’s Favorite Pasta,” following a challenge by Goya’s competitor, Riviana Foods, Inc. Riviana, the maker of Ronzoni pasta, argued that Goya had not substantiated its “favorite” claim through consumer survey or sales data. Goya responded that its claim was classic puffery. NAD disagreed with Goya, finding that “favorite” is objectively measureable and means a product is preferred over all others. NAD recommended that Goya discontinue the claim. Goya stated that it will appeal NAD’s finding.
The U.S. Department of Justice announced major news in the world of consumer products this month. A federal grand jury recently indicted two corporate executives for their roles in an alleged scheme involving residential dehumidifiers. The executives were charged with conspiracy to commit wire fraud, conspiracy to defraud the CPSC, and failure to furnish timely information under the Consumer Product Safety Act.
The facts alleged in the indictment portray egregious, bad-faith conduct on the executives’ part. According to indictment, the two executives ran and owned companies that sold dehumidifiers. By September 2012, the executives received multiple consumer reports that the product could catch fire and received test results showing problems with the product. The executives allegedly knew they were required to report this information to the CPSC immediately. Yet the executives failed to disclose the product’s problems for at least six months. Making matters worse, the executives deliberately withheld this information from the retail companies that bought the dehumidifiers for resale, from the insurance companies that paid for damage caused by the product’s fires, and from the CPSC. The executives also allegedly continued to sell the humidifiers to retailers with false certifications that the product met safety standards. When they did report to the CPSC, the report was late and it falsely stated that the dehumidifiers were not defective or hazardous. This scheme continued through April 2013—seven months after first receiving reports of problems with the product. In September 2013, the CPSC announced a recall of 2.2 million dehumidifiers sold by the executives’ companies. If convicted, the executives could face up to 30 years in prison and are subject to forfeiture, fines and criminal penalties.
This month also confirmed the CPSC’s continued focus on off-road vehicles. Three recalls in March addressed defects in off-highway utility vehicles concerning fuel leaks and crash hazards. These recalls come two months after the CPSC’s annual report on all-terrain vehicles (“ATV”). The results were grim: There were 15,250 ATV-related fatalities from 1982 to 2017, and 3,315 of these deaths were of children younger than 16 years old. Further, one year ago, the Commission approved a $27.25 million civil penalty—the largest in CPSC history—for a manufacturer’s alleged failure to immediately report defects in two types of recreational off-road vehicles. These recent developments show that the CPSC should and will increase its efforts at regulating and monitoring the market for off-road vehicles.
On March 20, 2019, the Securities and Exchange Commission adopted amendments to simplify and modernize disclosure requirements. These amendments implement recommendations from the Fixing America’s Surface Transportation (FAST) Act and are intended to make disclosures easier to read and navigate and to reduce repetitive and immaterial information.
The amendments involve changes to registration statement and prospectus provisions, Item 601 exhibits, and incorporation by reference and cross-referencing, among other changes. Some of the noteworthy changes include the following:
Registrants will be allowed to exclude discussion of the earlier of three years in MD&A if such discussion has been included in a prior filing.
Only newly reporting registrants will be required to file material contracts that were entered within two years of the applicable registration statement or report.
The Commission removed the time restriction under Rule 10(d) that limited incorporation by reference to documents that had been on file with the Commission for less than five years. Also, registrants will be permitted to provide hyperlinks to documents that are incorporated by reference in a filing instead of being required to file such documents as exhibits with the Commission.
Registrants will not be required to file attachments to material agreements unless such attachments contain material information or were otherwise disclosed.
Registrants will be permitted to omit confidential information in material contracts and certain other exhibits without having to submit a confidential treatment request to the Commission, if the confidential information is immaterial and would likely cause competitive harm to the registrant if disclosed publicly.
On Forms 10-K, 10-Q, 8-K, 20-F and 40-F, registrants will be required to tag all cover page data in inline XBRL, in order to further provide for investors’ use of interactive data.
The final rules provide for the amendments related to redaction of confidential information in certain exhibits to become effective on April 2, 2019, while the remaining amendments will become effective on May 2, 2019. However, the requirements to tag cover page data on certain filings will be phased in over three years. More information about the new rules can be found here.
The FTC teamed up with the U.S. Food and Drug Administration, sending warning letters to three companies: NutraPure, LLC, PotNetwork Holdings, Inc., and Advanced Spine and Pain LLC (d/b/a Relievus) that advertised CBD supplements as treatments for serious diseases such as cancer, Alzheimer’s disease, fibromyalgia and “neuropsychiatric disorders.” The two agencies told the companies to steer clear of false or unsubstantiated health claims and instructed the companies to notify the FTC within 15 days of the specific action taken to address the agencies’ concerns.